Freight factoring, also known as “trucking factoring,” represents a form of invoicing and paying for freight that provides trucking companies with a way to turn invoices that have not yet been paid into profit for the company. This also works for the owner-operator model. Freight factoring represents a common way for motor carriers or trucking operators to plug cash flow gaps while they wait for shippers and freight brokers to pay the bill.
There are specific freight factoring companies who handle invoices in this manner. As an example, a freight factoring operator may handle tens of thousands of dollars in invoices per month and advance 90% of the money collected within those invoices. The rates they collect in return can run anywhere from 1 – 4% of the total cost of the invoices they pay out. This is different from a straight bank loan, which would charge an interest rate, as opposed to a percentage of the invoice total. To put it in more simple terms, freight factoring represents the process by with accounts receivable invoices are provided to the company at a discounted price.
Basically, the freight factoring company pays the trucking company an advance and then waits to be compensated by the shipper or freight broker who needs to pay the invoice. In most cases, the freight factoring company will also handle collecting from the clients. As a result, the trucking company does not have to deal with the stress of figuring out when they will be paid. This allows the trucking company to both streamline their cash flow while at the same time not having to deal with clients who are taking their time paying an outstanding invoice. Yet, this is not always the case, as we will learn more about in the next section.
Freight Factoring by Type
If you are a trucking company who is looking into freight factoring because you are tired of bumping up against the 30-day payment limit from the shipper or broker then make sure you understand the different types of freight factoring. There are two different types of freight factoring, recourse and non-recourse factoring. But what’s the difference?
Recourse freight factoring refers to instances where a trucking company will sell their invoices to a freight factoring company that then pays the trucking company after the load has been delivered. In these cases, the days it takes for the operator to get paid may vary. The distinctive factor in recourse factoring is that the trucking company is responsible for collecting on the invoice. Recourse factoring is higher risk to the freight factoring provider because they must rely on a trucking company to collect on an invoice they have already been paid on.
For smaller trucking operators and owner-operators, recourse factoring represents a riskier proposition because if the trucking company cannot collect on the invoice, they are liable to the factoring company for the money that was paid out, and in some cases, fees may apply. This scenario could put a business at risk for a potential loss should invoices not get paid on time.
In non-recourse freight factoring, the opposite is true. When invoices are sold to the factoring company, the trucking company is not on the hook to collect from those clients. The factoring company pays you after the load is hauled and they assume the risk in the event the invoice is not paid up. Because this puts the higher level of risk on the factoring company, in many cases, a non-recourse factoring rate is slightly higher.
Small trucking companies and owner-operators typically look to non-recourse factoring as the most desirable option since the burden to collect is placed on the factoring provider. This avoids revenue-loss issues if there are collection complications. This way the company can focus on what they do best. Hauling the loads and getting freight from Point A to Point B.
Benefits for Different Size Operators
Freight factoring offers different types of benefits depending on the size of the operator working within the freight factoring framework. For small trucking companies or owner-operators, they can take on additional work without having to worry about whether that last invoice is going to get paid. For larger trucking companies, they can prevent interruptions in their cash flow operations.
Some businesses suffer from not being what are considered “prime borrowers.” Freight factoring eliminates this hurdle by letting trucking companies have their customers be judged based on their creditworthiness, rather than the trucking company itself.
Of course, neither small or large operators will get paid the entire invoice at once. As we mentioned before, the freight factoring operator will typically pay out 80 – 90% of the invoice’s value, then pay the remaining balance, minus their fee for the front, once the invoice has been paid by the customer.
Freight factoring terms and conditions will also typically be different depending on how much invoice factoring an operator needs. Freight factoring entities generally cater to operators of a particular size. If a larger trucking company wants $40,000 or more of factoring per month, they will generally seek different partners than a small owner-operator or trucking company that is doing business that requires less than $25,000 a month in factoring assistance.
What Fees are Associated with Freight Factoring?
Freight factoring companies charge different levels of fees depending on the company. Still, there are generally accepted and known levels of fees that trucking companies can expect when working with a freight factoring operator.
There are generally initial setup fees, which vary widely, then a transaction fee for the deposit. If the deposit is straight into a company bank account, fees are usually around $10. For wire transfers that occur on a per-transaction basis, fees generally run between $15 and $30.
The factoring company will also want to do a credit check on the client in question, which may carry a fee. There will also be a fee per invoice factored and then finally, a minimal commitment fee. Freight factoring companies will generally want to have a certain amount of invoice factoring committed, perhaps $10,000 or $20,000 for a smaller operator or more for larger companies.
While some freight factoring companies charge a termination fee if the trucking company no longer wants to work with them, not all do. For those that do charge a termination fee, costs can range anywhere from $500 to up to $1,000.
Qualifying for Freight Factoring
One of the great things about freight factoring is that it is a lot easier to qualify for than if you are trying to get a traditional business loan from a bank or some other type of long-term financing. When it comes to freight factoring, you don’t have to worry about whether you are a prime borrower or not. The reason for this lies in the fact that the factoring provider is more interested in the credit of your customer, rather than your credit. Your customer will have to repay the loan, after all. Still, trucking operators themselves must still go through a bit of a background check when signing up with a freight factoring company. Fortunately, the requirements are generally nominal. A business would need a decent credit score, a specific number of at least 530 or above, invoices that are outstanding at least to 90 days, and have been in business for 3 – 6+ months.
Larger trucking companies who want to factor tens of thousands of dollars at a time, which equates to a more long-term partnership, requires customers who are creditworthy – with a potential credit score being pulled – invoices outstanding out to 90 days, and at least two years or more of business history.
The costs associated with freight factoring generally depends on how long it takes the customer to repay the invoice. The freight factoring company may charge per week or per month that the invoice remains outstanding if it is a recourse factoring contract. This also varies based on the size of the company partnering with the freight factoring provider.
The higher the volume of freight being factored, there could also be additional fees. Some freight factoring providers charge one-time origination fees of up to $500 depending on the minimum requirements for them to factor your company’s freight.
Contract or spot factoring refers to a type of factoring that gives you flexibility to choose which invoices you factor. These situations require pretty high minimum requirements, $20,000 – $30,000 or more, and are mostly used by large trucking companies.
The bottom line is that freight factoring may be a good option for your business whether you are a large trucking company or a small owner-operator. Whether you need to utilize it to cover cash flow gaps or take on more contracts, projects, or clients, it can be a very helpful way to scale your business without having to worry about which of your customers are coming through on their invoicing commitments.
Still, the right type of factoring depends on the size of your business. We hope this blog post has helped inform your decision on the type of factoring that is right for you.