The Complete Freight Factoring Guide For Trucking Companies
Introduction
As a trucking business owner, you’ve probably heard the saying “cash flow is king.” Having adequate cash flow keeps operations running smoothly and fuels growth. Without it, even the most successful companies can fail.
In industries that require significant upfront costs, such as equipment, insurance, fuel, and maintenance, it can be challenging to have a steady flow of cash, especially when payment terms typically exceed 30 days. This is where freight factoring can help. In our Complete Freight Factoring Guide for Trucking Companies, we will explain everything you need to know, including:
What is Freight Factoring?
Freight factoring, also called transportation factoring or truck factoring, is a financial service made for trucking companies. It helps improve cash flow by turning accounts receivable into immediate cash, usually within no more than 24 hours. In this arrangement, trucking companies sell their freight invoices to a third-party company (“factor”) at a discount. The factor pays a large portion of the invoice upfront so that the trucking company doesn't have to wait for payment. The factor handles collecting the payment from the customer.
Transportation factoring companies specialize in helping trucking clients by simplifying processes and keeping more money in their hands. This financial service includes credit checks, billing and collection services, and reporting systems to assist with financial management. Trucking companies can focus on growing their business while receiving financial and operational support from their factoring partner.
Benefits of Freight Factoring
Increased Cash Flow
Freight factoring helps trucking companies get cash quickly. Instead of waiting 30, 60, or even 90 days for customers to pay, they can get paid within a day. This helps improve cash flow, allowing companies to cover expenses such as fuel, payroll, maintenance, and other operational costs promptly. With a steady stream of cash, trucking companies can focus on growing their business and taking advantage of new opportunities.
Improved Financial Stability
The cash received with this service helps trucking companies improve their financial stability. This stability helps companies manage their financial obligations such as loan payments, truck repairs, insurance fees, and other expenses better. With a solid financial base, companies can handle unexpected financial challenges more effectively.
Reduced Administrative Burden
Factoring companies help trucking companies with invoicing and collections, so they can focus on their main business. They also check customer credit to reduce the risk of not getting paid. Outsourcing these tasks relieves the administrative workload for trucking companies, allowing them to concentrate on their primary operations.
Flexible Financing Options
Freight factoring provides trucking companies with flexible financing choices that meet their specific requirements. Factoring companies can offer personalized solutions, allowing companies to decide which accounts receivable to factor or factor them all. This flexibility enables trucking companies to have more control over their finances. Additionally, factoring companies can adjust funding limits as the company grows, ensuring that the funding aligns with its expanding needs.
Opportunity for Growth
Factoring services benefit trucking companies by providing quick cash access, enabling them to seize growth opportunities. This allows businesses to invest in more trucks, expand their fleet, hire more drivers, or explore new markets. Factoring prevents growth from being hindered by delayed payments.
Enhanced Creditworthiness
Unlike regular loans, factoring doesn't affect a trucking company's credit status. Factoring relies on the creditworthiness of the trucking company's customers instead of the company itself. This is particularly advantageous for smaller or less creditworthy companies that may struggle to get traditional funding. By building a good payment history and showing lenders that they can be trusted, factoring can enhance credit scores for future financing.
How Freight Factoring Works
Although it might sound slightly confusing at first, the process is very simple. But before we begin, we need to have an understanding of how the advance provision affects the factoring process.
Advance Provision Terms
Advance Amount: The percentage of an invoice's total value that is provided upfront by the factoring company to the client, allowing for immediate access to a portion of the funds before full payment is received from the customer.
Reserve Amount: A predetermined portion of the invoice value that is withheld by the factoring company as a safeguard against potential non-payment or disputes.
Factoring Fee: The percentage charged by the factoring company for the services rendered.
Advance Provision
The advance provision in a factoring agreement determines how much money the trucking company will receive upfront and how much it will receive once their client pays the factoring company.
Partial Advance + Reserve Account
In traditional factoring agreements, a factoring company keeps a portion of the invoice amount as a reserve until the trucking company’s client pays. This is done to safeguard the factoring company against possible losses, discrepancies, or changes to the invoice.
Full Advance
In the transportation industry, it is common for the factoring company to provide a full advance on the invoice. The factoring company gives the trucking company the entire invoice amount, minus the agreed-upon factoring fee.
Freight Factoring Process
Here, we’ll take a look at the factoring process and how the advance and recourse provisions in a factoring agreement affect how freight factoring works:
Step 1: Deliver load(s). A trucking company delivers a shipment to its customers, and the Bill of Lading (BOL) is signed by the receiver, confirming the delivery was successful.
Step 2: Freight Bill Submission to Factoring Company. Instead of sending the freight bill to their clients and waiting for payment, the trucking company sends the bill to the factor. The factor usually asks for a copy of the signed BOL and rate confirmation.
Step 3: Verification Process. The factor reviews the creditworthiness of the client to confirm that the invoice can be purchased. They also make sure the invoice is real and accurate.
Step 4 is where we see a split in how the advance provision affects the factoring process:
Partial Advance/Reserve Provision
Step 4: Invoice Purchase and Partial Advance Provision.
After verifying the freight invoice, the factoring company buys it and gives the trucking company a large initial payment (usually 80 - 90% of the invoice value). The factoring company keeps the rest, called the reserve, until the invoice is paid.
Step 5: Collection, Reserve Payment, and Invoice Settlement.
The factoring company collects invoice payment from the client, deducts their fee, and sends the remaining amount to the client.
Full Advance Provision
Step 4: Invoice Purchase and Full Advance Provision.
After approving the freight invoice, the factor buys it and gives the trucking company the full payment in advance. The factoring company only keeps a small fee for their services, and there is no money held back as a reserve.
Step 5: Collection and Invoice Settlement.
The factor collects payment from the client for the invoice. Once they get paid, the invoice is settled. Since there is no reserve, there are no additional payments.
This process can then be repeated for each load, or loads may be “batched” for funding multiple loads at one time, significantly bridging the gap between the time work is completed and receiving payment.
But what happens if your customers don’t pay the invoice? Next we’ll look at the types of factoring and how non-payment may impact your business.
Types of Freight Factoring
Recourse Factoring vs. Non-Recourse Factoring
There are two main types of factoring: recourse and non-recourse. The recourse provision in a factoring agreement determines who has financial responsibility in the event that the trucking company’s client fails to pay the factored invoices.
With recourse factoring, the responsibility falls back onto the trucking company to repay the advance to the factoring company. While that may certainly be viewed as a drawback, recourse factoring typically provides for higher advance rates and lower factoring fees. In addition, a good factoring company will help you evaluate your clients’ creditworthiness in advance, substantially reducing the risk of non-payment.
In a non-recourse factoring agreement, the factoring company assumes the credit risk of the invoices, protecting the trucking company from potential payment defaults by their customers. Non-recourse factoring fees are usually higher compared to recourse factoring due to the increased risk for the factoring company. Additionally, the factoring company may only accept invoices from customers with a stronger credit history, limiting the business's ability to factor invoices from less-established clients.
Qualifying, Applying, & Choosing a Freight Factoring Company
How to Qualify for Freight Factoring
To qualify for freight factoring services, you typically need to meet the following requirements:
Your company needs to be in the transportation industry, specifically involved in hauling or moving goods.
Your customers must have good credit. Factoring companies will perform credit checks on these customers to assess their payment history and creditworthiness.
Your business must have clear, proper paperwork, including invoices and proof of delivery. Having organized financial records and clear documentation helps streamline both the qualification and funding process.
Your invoices must be free of liens, encumbrances, or outstanding obligations.
Some factoring companies may require a minimum volume of invoices generated per month, usually around $10,000 or more.
Choosing the Right Freight Factoring Company
When choosing a freight factoring company, consider the following factors:
Rates and fees: Make sure you understand how much each company charges for their services. Such fees may include:
Factoring Fee: Also known as the discount fee or the factoring rate, this is the primary fee charged by the factoring company. The factoring fee is a percentage of the total invoice amount that the factoring company retains as their fee. Typically, this fee ranges from 1% to 5% of the invoice value, depending on factors such as the creditworthiness of the customers, volume of invoices factored, and the length of time it takes for the invoice to be paid.
Set-Up Fee: Some factoring companies may charge a one-time set-up fee to cover administrative costs associated with onboarding new clients. This fee is generally assessed at the beginning of the factoring relationship.
Invoice Fee: Some factoring companies charge a fee per invoice purchased/processed.
Wire Transfer or ACH Fees: When transferring funds to the client's bank account, some factoring companies may charge wire transfer or Automated Clearing House (ACH) fees. These fees cover the transaction costs associated with moving funds electronically.
Monthly Minimum Fees: Some factoring companies may enforce a monthly minimum fee if your monthly factoring volume is less than their required monthly minimum.
Additional Service Fees: Some factoring companies may charge additional fees for various value-added services, such as credit checks on potential customers, online reporting, and access to fuel cards or fuel advances. These fees can vary depending on the factoring company and the specific services utilized. Other factoring companies may include these services at no additional charge (i.e. free credit checks, free fuel advances).
Termination Fee: Some factoring agreements may include a termination fee that is charged if the client decides to end the factoring relationship before a specified period. This fee is meant to compensate the factoring company for costs incurred and loss of future earnings.
Customer service: Look for a company that provides excellent customer service and is responsive to your needs. Companies should pay attention to factors such as response times, communication effectiveness, and problem resolution. Some methods you may want to use include:
Network/Referrals: Reach out to other businesses you may know in the trucking industry or network to gather recommendations and referrals. These firsthand experiences can provide valuable insights into the customer service quality of different factoring companies.
Online Research: Reading customer reviews and testimonials for a broader perspective. Not only can you get an overall ranking of customer satisfaction, but you can get a glimpse into real-world experiences customers have received.
Direct Contact: Engage factoring companies directly and ask specific questions about their customer service processes and policies. By engaging in-person or over the phone, you’ll be able to get a feel for the company’s service culture. Having these discussions in advance helps make sure that both you and the company are on the same page about what level of service you want.
Experience: Choose a company that has experience working with trucking companies. The trucking and transportation sector has unique challenges, so it's important to have a factoring company that understands them. An experienced transportation factoring company will understand how to quickly evaluate the financial reliability of shippers and brokers, handle collections, assist with trucking industry regulations, and provide value-added services.
Contract terms: Make sure you understand the terms of the contract before signing. Reputable factoring companies will be very transparent with their contract terms. On the other hand, it’s not uncommon for some factoring companies to bury unfavorable contract terms into their agreements, such as:
Hidden fees
Lock-in agreements that force you to factor all of your invoices
Long contract terms
Undisclosed recourse clauses that transfer risk back to your business
Excessive termination fees
Limited written termination notice timeframes prior to auto-renewal
It is crucial for businesses to thoroughly investigate and diligently choose a factoring company that provides competitive factoring rates, prioritizes customer service, utilizes industry experience, and offers fair contract terms to ensure a mutually beneficial relationship.
How to Apply for Freight Factoring
After you've chosen your preferred option(s), you can proceed to apply with the factoring company. The factoring application process is usually easier and faster compared to other types of financing. The required documents may include an application, an A/R Aging report, Articles of Incorporation, Operating Authority, and some additional documents to confirm your identity. Depending on the factoring company, you could receive approval on the same day.
Unlike traditional forms of financing, factoring focuses more on the creditworthiness of a company's customers rather than its own credit history or collateral. This means that even startups or businesses with limited credit history can qualify for factoring, as long as their customers have a solid repayment track record.
Conclusion
In conclusion, freight factoring offers numerous benefits to trucking companies seeking to improve their cash flow and accelerate their growth. By utilizing these services, businesses can access immediate funds for their outstanding invoices, reducing the cash flow gap caused by slow-paying customers. Furthermore, it eliminates the need for trucking companies to take on additional debt or give up equity in their business, providing a flexible and accessible financing solution. Ultimately, freight factoring empowers trucking companies to focus on their core operations, expand their business, and achieve long-term success.
About Transwest Capital: With our expertise in the transportation industry, Transwest Capital helps trucking companies in our home state of California and throughout the country, to effectively manage their cash flow and keep their businesses moving forward. Our flexible and tailored factoring solutions help transportation companies have the financial stability they need to succeed in a competitive industry. If you're looking to optimize your cash flow, consider exploring the advantages of freight factoring with Transwest Capital.