We all know what freight is, but it’s when factoring is added that it gets a little complicated. The word “factor” is both a noun and a verb. In this sense the word should be taken at its definition as a noun, which is the business of purchasing and collecting accounts receivable or of advancing cash on the basis of accounts receivable.
Whether you’re a solo owner / operator or running a 50 truck fleet, the ability to control and optimize your cash flow could make or break your business. A freight factoring company will pay you a percentage and assume responsibility collecting on the invoice. There are alternatives to this method, but they’re less appealing.
Opening a floating line of credit is an option, but this carries potentially higher interest rates and comes with its own inherent risk. With freight factoring there’s no debt incurred; nor are there any monthly payments.
It’s also impossible to walk into a bank with an invoice and expect money to be advanced based on said invoice. To them it’s merely just a piece of paper. They feel the risk is too great to assume if the customer does not pay. This is where freight factoring fills the gap.
How It Works
The best option will always be to invoice the customer directly and wait for their payment, but many customers can be slow to pay on their invoices. For those that need cash right away, freight bill factoring provides an additional option.
Transportation factoring is quite simple. It involves nothing more than giving your unpaid freight bills to a third party for less than you’d receive if you were to bill the customer and wait. This gives you faster access to money you need to fund your day-to-day operations.
Here’s how it generally works, step-by-step:
- You book your load.
- You send the details about your customer, the load, and your rate to the factoring service.
- The factoring service gives you the green light if your customer is approved for load factoring.
- You complete transportation of the load.
- Once empty, you send the Bills of Lading and load-related documents to the factoring service.
- Within 24 hours the factoring service will advance you an approved amount, which is usually somewhere between 60 and 90 percent of the total billing.
- Once the customer has paid the factoring service, you receive the balance.
It should be disclosed that freight bill factoring isn’t free. As business owners, it’s up to us to determine what services are worth the cost, based on our circumstances.
Freight bill factoring costs generally float between the ranges of 1.5 and 5 percent of the line haul revenue. The factoring service is provided as a retail product, a sale, as opposed to a banking product, or a loan. The risk associated with accepting the invoice is born out in the nominal fee.
Types of Freight Factoring
Freight factoring is not created equal. There are generally two types:
- Recourse-based: If the customer fails to pay the invoice, the factoring service can come back to you for reimbursement.
- Non-recourse based: If the customer fails to pay the invoice, you still get paid.
While some options allow for a load-by-load factoring, others require that all future loads be factored through said option. Many factoring services provide you with the option to choose how the relationship develops, depending on the customer.
This allows you to also decide whether or not you want immediate payment or payment when the invoice is paid. There’s a convenience in using the factoring service as a de facto billing service.
Not every service is right for every business, but if the ideas of a high interest bank loans or negative cash flows are unappealing, freight factoring may present an acceptable alternative.