Freight factoring, also called transportation factoring or trucking factoring, has been around for quite some time. Yet freight company owners and truck drivers tend to see factoring as a new fad. They misinterpret factoring as companies looking to make money rather than having their interest in mind. However, factoring has been around for a long time and can benefit many small trucking companies.
Freight factoring helps trucking companies receive a payment on the majority of the invoice value, typically within 24 hours. This provides quicker access to cash for business expenses since some invoices can take up to 90 days to receive payment. Choosing factoring services has become popular due to the rising costs of hauling freight and other economic factors. Continue reading our Ultimate Guide to Freight Factoring to learn more about freight factoring and whether using factoring services is right for you.
What are freight factoring services?
Businesses use freight factoring services to sell their invoices (at a small discount) to factoring companies or banks (“factors”) in order to receive a payment, typically within 24 hours. The trucking company gets paid early and the factor does the waiting for payment on the original invoice.
Paying a service rather than waiting for invoice payments to process may seem like a senseless expense, but with the standard processing payout time at 30-, 60-, or 90-days freight factoring has become vital. For small trucking companies, using factoring means that business can resume as needed. The working capital that would otherwise be stalled can be used to keep the business running when cash flow is tight. No wait time on payments means that businesses can meet their monthly expenses rather than fall into debt. Before freight factoring, companies had to rely on bank loans, which can be complex and difficult to establish, or high-interest credit cards to keep their businesses running.
Using a freight factoring service has additional benefits that we will cover in detail later. One important advantage is that the billing and collecting on invoices falls into the hands of the factor and gives the trucking business more time for other things, like hauling more loads.
How does freight factoring work?
Freight factoring is when you submit your invoices to a factoring company rather than a broker. The factor then pays you a majority of the invoice value right away. The factor then waits for the broker to process the original invoice, which can take 30-90 days depending on your payment terms. After the payment is collected, the factor will send you the remaining balance, minus a small percentage. Factoring companies help the trucking industry with increasing business transactions and keeping the business moving.
What do freight factoring companies do?
Freight factoring companies offer trucking companies business finance solutions so that they can continue to run their business. Working with a factoring company looks like
- Submit a factoring application. Upon approval, sign a contract. Details about the factoring service will be provided in the contract, including fees that the trucking company will pay to the factor.
- Customers that pay the trucking company will be assessed or approval by the factor.
- Your invoices will be sent to the factor. The factor will then pay the trucking company and then wait to collect full payment from the customer.
- The factor will work with the customer or make collection calls as needed. Therefore, the trucking company can work on their business rather than tracking invoices.
- Lastly, once the factor is paid by the customer’s original invoice, they deduct their fee and provide the trucking company with any remaining amounts owed to them.
How does a factoring company differ from a bank that offers factoring services?
In the past, companies would rely on banks for loans to gain working capital, which came with many inconveniences. Freight factoring quickly became an effective and immediate option for small businesses to increase cash flow by using unpaid invoices to secure a line of credit from a trusted lender. If you want your company to grow and thrive, you need to choose a reliable lender you can trust. Factoring companies, as well as banks, can be factors. Many banks, such as TAB Bank, became that trusted lender, when freight businesses were looking for a factoring company.
Using a bank as your factoring company brings experience and the resources you need to access working capital, typically offering the best rates and quickest service in the industry while increasing stability. Gain a central source to a stable financial partner, working with someone who knows your company and tailors their services to your needs. Bank factors provide flexibility as you grow, from offering factoring to lines of credit or asset-based loans. Gain the benefits of a bank plus a factor all in one place.
How much do freight factoring companies charge?
Freight factoring companies charge a percentage from the invoices that they collect from customers. Typical charges are around 3.5% but may vary. The factoring charge or rate that a trucking company pays also depends on how many invoices or the volume of invoices factored. Another consideration for how much is charged is the risk from customers or brokers. Ultimately, how much a freight factoring company charges depends on the terms of your contract.
What are typical factoring fees in trucking?
In addition to the factoring rate charge, other fees could be added to your factoring service. Two standard fees that might be included are invoice processing fees and ACH processing fees. You can find these and any additional fees in your factoring agreement. Examples of additional fees are administrative fees, monthly minimum fees, and early termination fees.
- Administrative fees are charged when an account needs reports or other general maintenance to keep the account current.
- Monthly minimum fees are charged when a factor has processed fewer invoices for the month than what was agreed upon in the contract.
- Early termination fees are charged when a trucking company wants to opt out of a contract earlier than the agreed-on time. It is recommended that you read and discuss the agreement with your factor before agreeing.
Look for a factoring company that will be transparent and reasonable about any fees. Since the fees you pay will come directly from your profits, there should be no unexpected or hidden fees.
Do you have to factor every load?
No, you do not necessarily have to factor every trucking load. However, every freight factoring company is different, so it is important to check the terms of your agreement regarding factoring every trucking load. One term to look out for is spot factoring, which means that you can choose which invoices you want to factor. If your factor offers spot factoring then you should not have to factor every load.
How do freight factoring companies assess risk?
When it comes to assessing risk, freight factoring companies consider several factors. Before approval, factoring companies may look into the credit of customers and trucking companies. Credit scores are used to determine the stability of customers that trucking companies bill. Other risks assessed are whether invoices are valid, how large and diversified the customer base is and the cash flow of the trucking company. Lastly, factoring companies assess whether customers are wasting time for trucking companies with collection calls or slow payments. As freight factoring companies provide solutions to many of the areas assessed, not all areas are reasons for a factor not to approve factoring. Each factor is different and may have a differing risk assessment for approval.
Benefits of freight factoring for trucking companies
One benefit of factoring for trucking companies is how it improves cash flow. As previously mentioned, invoices paid to truck companies can take up to 90 days to process. Using factoring companies, a trucking company can get paid for their work within 24 hours rather than waiting. Payment is predictable and reliable when you work with a factor. Freight factoring, sometimes called load factoring, provides the benefit of business growth. Increasing cash flow and providing the business with working capital for monthly budgets creates more opportunities for a trucking company to grow. The stress and possibility of not being paid are greatly reduced when you have a trusted service to help collect payments and monitor how reliable a customer is.
Another benefit of working with factoring companies is that it can significantly reduce the workload for trucking companies. The work that trucking companies would otherwise do—such as invoicing, following up on calls to customers, and collections—can be spent on hauling more loads. All the work that a factor can do benefits the trucking industry and makes accounting efforts more efficient.
Additionally, factoring companies typically renew their contracts annually or twice a year, this is a benefit because it means that trucking companies will not be locked into a long-term contract. The last benefit of factoring is there is less risk of accumulating bad debt. Using non-recourse factoring means trucking companies are protected from events where clients declare bankruptcy or close business because factors have assumed most of the risk & liability.
Do you need a factoring company for trucking?
When determining whether or not you need a freight factoring company for your trucking business, consider all the benefits of factoring. If resolving cash flow issues or paying short-term expenses are concerns, then utilizing a factor could be a great solution. This is especially true if loans or other financing options are not available.
What is the difference between recourse and non-recourse factoring?
Two main types of factoring that you may hear when you are looking for a freight factoring company to work with are recourse and non-recourse factoring. When a trucking company passes its invoices along to a factor, the factor receives a percentage of the payment when it is collected. The trucking company will then receive any remaining balances of the invoice after the factor has been paid by the customer’s invoice.
Recourse factoring
Recourse factoring means that the factor will not take the risk of bad debts. This means that if a customer’s invoice does not pay out the factor, they will reclaim their money from the trucking company. Although factoring companies have measures in place to prevent this situation, such as credit checking customers or brokers, it is a term to be aware of when signing a factoring agreement. If recourse factoring sounds like a great fit for your business, the factoring agreement will provide you with details on how many days after a payment is due that a refund is to be collected. Overall, this means that the trucking company is responsible for any non-payment by a customer.
Non-recourse factoring
Non-recourse factoring is when a factor takes on the risk if customers do not pay. This type of factoring applies to specific situations such as if a customer claims bankruptcy or closes down. Other non-recourse agreements usually apply to debtors with a good credit rating, because those with bad credit are at a higher risk of non-payment. The last important detail about non-recourse factoring agreements is that they typically have a higher cost or rate (the percentage of the invoice amount paid to the factor). Whether you choose recourse factoring or non-recourse factoring, it’s important to understand the agreement and ask questions about any terms that are unclear.
How to choose the right freight factoring company
When choosing a freight factor there are several things you should consider.
Established factoring business
The first is how long has the factor been in business? Working with an established freight factoring company with years of experience means a higher chance for long-term funding. Also, working with an established factoring organization can produce faster funding and lower factoring rates. The opposing smaller or new factor may charge more and not have the capital to fund your needs.
Specialized factoring business
Some factors have specialized expertise in the trucking industry. This is important because not all factoring companies will be equipped with the right industry terminology. Working with any other factor could result in confusion over the difference between common trucking industry terms such as bill of lading and rate confirmation. Another consideration is that with a freight-specific factor, any news or updates within the industry are likely to be noticed and followed by a specialized factor. An additional bonus is that a specialized factor may offer perks and extra features that are tailored to your industry.
Easy credit checks
Some factors will offer an online portal where you can quickly and easily check the credit of your customers. This is beneficial because it can help your trucking company determine whether accepting a given hauling job is a good choice. As we covered, jobs for customers with good credit can be a component that means you are likely to receive payment.
Personalized service
At the first meeting with your factor provider, ask if having a dedicated team for your business is something they offer. This service can benefit your trucking business by allowing you to have people available that are acquainted with your specific needs. Having a dedicated team also means your account will not require constant updates for management. Dedicated customer service for your business is a must for your factoring needs and it can provide you with more time for other things.
Zero hidden fees
Avoid paying hidden fees with your factor. We covered the types of fees and it’s essential to ask questions and read over any fine print in your contract with a factor. Finding hidden fees after an agreement has been signed is not suggested.
Spot factoring or not
Spot factoring means that you can pick and choose what invoices are factored. Not all factoring companies offer this flexibility so if this is something you might be interested in, it’s important to check that it’s offered. Make a point of asking if this type of factoring is available.
Recourse or non-recourse
The difference between recourse and non-recourse is whether or not you want to accept the risk if your customers do not pay an invoice. Our guide covers the two types of factoring in detail (found above) so be sure to understand which one works best for you.
Conclusion
As you have learned, factoring provides trucking businesses with many benefits. Utilizing a factor for your trucking business can significantly simplify your payment collection process and increase your cash flow. Our goal is that this guide for freight factoring has helped answer your questions about factoring.
For more than 25 years, TAB Bank has specialized in factoring for semi-truck, freight, and other transportation companies. We have been named one of the best Factoring Companies by FactoringClub, trusted by hundreds of businesses to help improve their internal operations and get paid faster – you can too. Apply today.
Learn more about our factoring service.
