What is Freight Factoring?

Written By Andrew Brooks Published on February 16, 2024 freight factoring Last Updated March 7, 2024 Edited by

Cash flow is a commonly seen problem in the trucking industry. It’s no secret that every fleet company needs funds to keep their trucks rolling and their businesses thriving. Freight factoring, commonly known as trucking factoring, is a method used by companies to easily convert your payment invoices to instant cash funds and put an end to the delays in the payment after every load. Freight factoring is a commonly used process in the trucking industry to get paid for freight services without any hassle.

Traditional payment methods in the trucking industry can take months, halting your trucking services. It can be a frustrating process to get your work hindered because of a lack of funds that are locked away due to unpaid invoices, especially when your business is growing, you’re expanding your operations, or you’re hiring new drivers for your trucks. In situations like these, freight factoring comes in handy and becomes an integral support for your business.

What is Freight Factoring?

Freight factoring, commonly called trucking factoring, facilitates the expedited processing of load invoices, enabling immediate payment receipt instead of enduring extended waiting periods of 30, 60, or even 90 days for load settlement. This expedited payment mechanism injects vital working capital into the operational continuity of the business during the intervals between invoice disbursements.

Freight factoring differs from traditional financing as it relies on invoice-based transactions, providing swift cash advances against load invoices. In contrast, traditional financing is credit-based and involves a more extended approval process based on a business’s creditworthiness and collateral.

Imagine owning a trucking company and just completing a shipment for a client worth $5,000. You use freight factoring instead of waiting for the client to pay you in 30 days. You sell the $5,000 invoice to a factoring company at a 2-5% discount. The factoring company immediately advances you a portion of the invoice, typically around 90%, which is $4,500. They hold the remaining $500 as a fee. This way, you get quick access to funds to cover operational expenses or take on new shipments while the factoring company waits for the client to pay the full invoice.

Why is Freight Factoring Necessary?

In trucking businesses, cash flow is the lifeblood that sustains operations. Freight factoring ensures a healthy cash flow by providing readily available funds for essential expenses like fuel, payroll, and maintenance. It’s a streamlined approach to managing finances in the trucking industry. With freight factoring, you sell your delivered freight invoices, effectively converting accounts receivable into immediate cash. This constant influx of cash keeps your trucks on the road, ensuring uninterrupted operations.

Additionally, there are several other benefits related to freight factoring:

Fast payment transactions: Drivers can get paid as quickly as 24 hours after submitting their invoices.
Improved cash flow: Do not hinder your operations and trucking loads since cash flow is steady, and hence financial planning can be smooth.
Outsourcing: Unburden yourself freeing up your time and resources indulged in maintaining accounts by getting a third party into action.
Risk protection: Avoid late payments on any kind of debt that might put a spot on your business’ image.

Moreover, you can maintain a steady cash flow, especially if you are a startup, just by using freight factoring and getting paid almost immediately.

How Does Freight Factoring Work?

Factoring is a standard practice within the trucking industry, and the qualification process is simple. To be eligible, you must operate a trucking company, which includes being an owner-operator and providing services to customers with solid credit. That’s the extent of the qualifications required for participation.

Freight factoring simplifies a crucial aspect: expediting payment for completed work. Here’s how it works:

Your truck driver completes a standard load delivery.
You send essential documents, such as the rate confirmation and bill of lading (BOL)/proof of delivery, to your chosen factoring company.
The factoring company confirms the delivery with the brokerage or shipper.
Following verification, the factoring company deposits the payment into your account using your preferred funding method, which can result in an overnight or immediate transfer.
Subsequently, the factoring company takes charge of collecting payments for the entire invoice duration.
Once the customer settles their dues, the factoring company deducts their fee and closes the invoice.

Understanding Freight Factoring Terminology

To understand how freight factoring can be beneficial for your business, it is necessary to understand the terms and costs associated with freight factoring, some of which are discussed below:

Rate: As a trucking company, you must verify the authenticity and necessity of all the rates involved in the freight factoring process. Your rates fluctuate in direct correlation with your business volume. Typically, the factoring fee falls within the range of 2.5 percent to 5 percent. Furthermore, certain companies may impose initial setup costs and fees for accommodations during the process. Therefore, it is of utmost importance to comprehensively grasp the rates that are being charged.

Terms: You might often encounter the term spot factoring, which comes into play when you want to customize your freight and select only specific invoices to be factored in. Many factoring companies offer such plans, which are considered quite a favorable option for small trucking businesses. Contradicting this, large freight companies choose contract factoring, which allows them to negotiate rates and factor all their invoices together.

Qualifications: Not everyone qualifies for freight invoice factoring, and specific criteria must be met for approval:

Typically, the factoring company will set a minimum credit score.
Initial approval for your first factor may take some time.
A minimum of 90 days in business is usually necessary.
Younger freight companies may need to demonstrate a minimum annual income or projected yearly income.

In a standard factoring agreement, you may encounter two common fees: invoice processing fees and ACH processing fees. Your factoring agreement will provide a comprehensive list of these charges, which may also include additional fees like administrative fees, monthly minimum fees, and early termination fees.

Administrative fees: They are applied when account-related reports or general maintenance are necessary to keep your account up-to-date.

Monthly minimum fees: This comes into play if the number of invoices processed during a month falls below the agreed-upon threshold specified in the contract.

Early termination fees: They are incurred if a trucking company opts to terminate a contract before the initially agreed-upon term.

It is highly advisable to thoroughly review and discuss the terms of your agreement with your factoring company before finalizing it. Seek a factoring partner known for transparency and fairness in fee structures, as these charges directly impact your profits, and unexpected or concealed fees should not be part of the arrangement.

Types of Freight Factoring

Generally, there are two types of freight factoring companies: recourse and non-recourse factoring, which are explained below:

Recourse factoring

In simple terms, recourse factoring is a way of financing invoices where freight factoring processes the invoice for instant cash. Now it becomes the responsibility of the freight factoring company to collect the cash from the business’s clients. In any case, where the client fails to complete the payment, the freight factoring company asks the trucking business to repay the amount.

Let’s look at a simple example to understand how this works:

Suppose you are a trucking company owner and you sold your invoice of $1000 for $900, then received an immediate payment of $900 from the factoring company. Now the factoring company went to your client to collect the payment from the invoice of $1000, which the client failed to pay.

So the freight company can come back to you (a truck company owner) to receive its payment of $900, which it initially paid you. And in case the client successfully makes the payment, the factoring company will keep the $100 as its commission for the service of immediate payment.

Recourse factoring is a good option for new trucking companies and for those whose clients have poor credit ratings.

Non-recourse factoring

It is the opposite of recourse factoring in that it assumes the risk of not receiving payment from the company’s customers. In other words, non-recourse factoring is a type of invoice financing where the truck company sells its invoice to the freight company, and the freight company is responsible for an immediate payment and assumes the risk associated with it.

Non-recourse factoring is a more favorable option for those companies that want to keep their cash flow steady and do not want to get included in any bad debts. However, it is important to know that non-recourse factoring includes strict rules that must be followed and conditions that must be met. Hence, it is advisable to read and understand the terms associated with non-recourse factoring.

Spot Factoring

Spot factoring is a very specific type of factoring that trucking companies frequently use to cover a specific expense. Spot factoring includes the financing of a single invoice rather than taking into account various invoices. Trucking companies that need to process a single sizable one-time invoice can use it.

Contract factoring

Large trucking companies most frequently use contract factoring, where they work with a freight company to handle all of their invoice finances for a set amount of time. However, you should be aware that freight factoring is a complicated process that involves extensive terms and agreements that the trucking company must fully comprehend before entering into any contract with a freight company.

Advantages and Disadvantages of Freight Factoring

While freight factoring is there to make the payment process easy for trucking companies and provide them with a steady cash flow, it comes with its advantages and disadvantages. Some of them are listed in the table below:

Advantages	Disadvantages
Faster payments: factoring provides rapid access to cash, improving cash flow and supporting operational needs.	Costs Involved: Factoring fees, while providing liquidity, can be higher compared to traditional loans, impacting the overall profitability of each transaction.
Easier Qualification: Factoring is accessible to businesses with good creditworthy clients, making it a more attainable financing option than traditional loans.	Potential for Negative Customer Relations: Some customers may perceive third-party involvement negatively, potentially straining relationships if not managed carefully.
Flexibility in Terms: Factoring terms are often adaptable, allowing businesses to choose which invoices to factor and providing financial flexibility.

How do I Choose a Freight Factoring Company?

When you are seeking a freight factoring company, it’s essential to discuss the operations of your business with them and understand their services and the conditions associated with them. Also, pay close attention to the costs associated with freight factoring, such as commission rates and setup costs (if any). Some of the key features that must be taken into consideration while choosing a factoring company are listed below:

Payment speed: Understanding the time of your payment and invoice financing is one of the most important steps when selecting a factoring company. Ensure the payments are made quickly and are reliable in nature.
Borrowing capacity: Borrowing capacity is the maximum amount that you can encash through your invoices. Make sure the borrowing capacity aligns with your operational requirements and cash requirements.
Program Types: Depending on your company’s needs Inspect if they offer recourse or nonrecourse factoring, depending on the requirements of your trucking company.
Advancement Percentages: Investigate how much funding you will receive out of all the invoices and clarify if any advance funds will be kept reserved from the freight company.
Aged invoices: Aged invoices include the fees that the trucking company must pay based on how long the client takes to complete the payment. Understanding if and how much payment is required is essential.
Contract termination: Understanding the duration of your contract with the factoring company is essential. Additionally, pay attention to the notice period for ending the contract.
Additional Fees: Additional fees can include terms such as per-transaction costs, set-up costs, early termination penalties, or any other operational or administrative costs.

Having personally used it, we highly recommend using the Matrack factoring solution for your trucking business. It is simply a top choice, offering exceptional features listed below:

No credit check: If you have a corporation, the Matrack factoring solution does not require your SSN for credit checks, enabling the smooth processing of invoices.

Same-day funding: Enable a steady cash flow with 100 percent funding on the same day and ensure smooth operations for your business.

Free telematics: Matrack offers its free telematics system, including an Electronic Logging Device (ELD), when you sign up with us.

Competitive rates: Matrack Freight Solutions has one of the lowest fees associated with freight invoices that go as low as up to 2 percent or even less. It allows your company to maximize profits and ensure excellent financials.

Choosing Matrack Factoring Solution is a wise choice, especially to ensure smooth operations for your business and make it a hassle-free experience.

Conclusion

For various trucking companies, without a doubt, freight factoring is a savior regardless of the size of invoices. The freight factoring process comes as an aid to trucking companies, helping them align their financials, maintain steady cash flow, and ensure efficiency in all their operations. However, freight factoring can be a complex process for some companies, given their contracts and terms and conditions. Hence, it is important for the trucking companies to thoroughly understand what you are getting into before making any contracts.