Understanding Freight Factoring
Chances are, if you’re in the trucking and transportation industry, that you’ve heard the term “freight factoring”. Freight factoring has become a popular way for companies to avoid lengthy delays in payment on invoices.
Many drivers and business owners don’t understand precisely what it is, or how it works.
Freight factoring has the potential to financially benefit many stakeholders in the trucking industry by providing an influx of working capital into the company. This is especially true for owner-operators, who often spend as much time on their finances as they do on the road.
What is Freight Factoring?
Freight factoring (also known as trucking factoring) takes the invoices for the loads that you run and allows you to get paid on them now Instead of waiting for a load to be paid out, which could take up to 90 days or more depending on the load. This becomes vital in trucking as invoice payments are almost never made immediately. The industry standard is 40 days (or more) to fully process payouts to drivers and trucking companies.
With freight factoring, a company or owner-operator makes their delivery as usual, but instead of waiting on payment, they transfer the invoice for the job to a third party company. This company will “buy” the invoice for slightly less than the total owed for the load, but they make up for it by paying for it immediately. The freight company then is able to go about their business as usual, while the freight factoring company waits for payment.
Immediate payment can be a lifesaver for smaller operations, allowing them to cover expenses without incurring any debt.
Freight Factoring Isn’t New
Many truckers assume that factoring is new or just a bunch of predatory companies, but factoring has been around for many years. The main reason for its growth in popularity is likely due to global economic factors.
What Does a Freight Factoring Company Do?
It is important to know the basic service that a factoring company offers to truckers. Let’s take a closer look at how the invoice factoring process:
- A company (customer) needs a load shipped to a specified location.
- They hire a driver to deliver it, and they do a credit check with your factoring company to see if the customer’s load qualifies for their services.
- If they do, upon delivery, the driver sends the invoice and all paperwork for the load to the factoring company.
- They purchase that invoice, and the drivers’ company receives payment.
- The factoring company then collects the payment from the customer at a later date.
Depending on a number of situations, there may be a few additional steps involved in this process. Trucking companies don’t hire factoring companies, they apply for them.
Freight Factoring Application Process
Applications for many freight factoring companies usually only take a few minutes. Some applications will allow the factoring company to immediately collect on your receivables, so always be careful when filling out an application to make sure it is not a binding contract.
Factoring companies look at risk and volume when determining if a trucking company qualifies. They will likely ask for other information as well, like:
- Monthly Invoice Volume – The more you factor the less you pay as a percentage.
- Customer Base – Are you working with multiple freight brokers off load boards or just one customer? Having 100% concentration with one debtor can be risky.
- Customers Days to Pay – There is a large difference between having $20K out for 25 days compared to 75 days. Essentially the factoring company could have purchased three times the amount of invoices with the customer who pays in 25 days.
- How much of your invoice do you need to operate your business – Factoring companies can limit their risk by only advancing 85%-95% of the load when you deliver. This can help you get a lower rate.
The factoring company will then make an offer. Always review the terms of the contract for:
- Max credit line or max factoring facility – Limits how much you can grow with a factoring company. A lot of factoring companies get larger loans from other banks, and they will limit a carrier’s growth so they can accelerate their credit line with their debtors.
- Percentage of invoice advancement – Are you getting all the money the day you deliver, or will you have a “reserve” account with the factoring company?
- Invoice Age – When a factor does not advance the full amount, it is likely that there will be aging fees. This will increase your cost with the factoring company. The longer your customer takes to pay, the more you pay in aging fees.
- Other fees – Are there any other transaction fees or cost to send the money to the carrier?
- Qualification Time – The majority of companies will send advances via ACH the next day. If the carrier misses the cut off time or “qualification time”, the deployed advances are delayed by a day.
- Contract Length – The factoring company will have a contract length.
Recourse Vs. Non-Recourse Freight Factoring
Recourse is a clause in your contract with a freight factoring provider that allows them to collect from you if your customer does not pay promptly (or worse, doesn’t pay at all). Non-recourse means that if your customer declares bankruptcy or goes out of business between the time you submit your invoice and when they are supposed to pay the factoring company, the factoring company will not try to collect from you.
How Much Do Freight Factoring Companies Charge?
Factoring companies charge a small percentage of the load invoice as a fee for the service. This is usually around 3%-5%. Carriers are often required to pay both invoice processing and ACH fees, which further reduce how much of their earnings they keep.
Is Freight Factoring Right For Your Trucking Company?
Ask yourself these questions:
- Do my customers take a long time to pay me?
- Is a lack of cash flow negatively impacting my ability to grow my business?
- Are slow paying customers impacting my ability to pay my vendors on time?
- Do I have issues related to my customers’ creditworthiness?
- Do I know the broker/shipper will pay me before I take a load?
- Am I spending valuable time making collection calls?
If you answered ‘yes’ to any of these questions, then there’s a good chance that factoring some or all of your invoices could help you. By taking advantage of what factoring can offer, you can spend more time on your customers and expanding your business.
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