Freight/Transport/Truck factoring is a vital part of the trucking ecosystem. Factoring help to induce much-needed working capital/ money into your business.

Truckers get invoices and you have to wait 30/45/60/90 days to get funded after you deliver a load. This reduces the cash flow of your business. Whether it be fuel charges, repairs, buying supplies, oil change, trucker salaries, etc. you should have cash. Cash is the king and factoring is minster who provides you with the cash

Hello trucker friends, we are highlighting 7 must-know facts about transport factoring in the USA.

1. What is Truck Factoring or Freight Factoring?

Truck/Freight Factoring is the process in which an owner-operator/trucking company sells an outstanding truck freight bill to a factoring company for a cash advance of up to 98%.

Truck factoring is not a loan. Factoring helps truckers/carriers to get working capital fast and cheaply.

2. Process in Truck Factoring/How does truck factoring work?

Eg: If ABC trucking generates an invoice of $1000 by delivering a load of the same value from a Freight broker. In this situation, the ABC trucking will have to wait 30/45/60/90 days to get the payment of their invoice. That will dent ABC trucking cash flow. So what ABC does is factoring or it sells its invoices to a factoring company at a discount of 1% to 4% ($10 or $40) and receives the rest of the money ($960) as advance. 

ABC trucking company is handled by an owner-operator, ABC takes a load from a shipper/broker and successfully completes the load. ABC has gotten an invoice/document suggesting it completed the load.

Now it has to do transportation/ truck factoring to get the due amount into its account.

ABC has to put in a factoring application. Once it’s approved the factoring company will issue a factoring agreement ( which contains the features/specifics of the contract) like fees, duration and period, etc
The factoring company will find the creditworthiness of ABC’s customers and shortlist the customers that the factoring company can work with
ABC pull the load, then ABC sends the invoices to be factored in. The factoring company advances the percentage of the invoice value and works with the shipper/broker to collect the discounted invoice on time.
From their call center, the factor’s dedicated account executive will make calls as required to the shipper/broker to collect the invoices
When the invoice is paid, factor returns your reserves back to you after deducting the invoice factoring fee ( if you go for a plan with reserves held back)

Truck factoring streamlines the payment process in shipper/broker to carrier interaction. This process allows carriers/truckers to get invoice/bill money in advance to pay up their expenses whether it be fixed or variable.

For the application of transport/truck factoring, we need to complete the application and submit the documents given below:

Operating authority
Proof of insurance

Transport/truck factoring is a very simple process:

  • Driver pickups and delivers the loads to a customer (usual business)
  • Sends a copy of the trucking invoice to the factor via email, mobile app, or portal, it will be also verified by the factoring company
  • Factoring company cuts the invoice discount/fee and give you back 96% to 98% as advance
  • Shipper/broker sends the payment to the factoring company
  • The factor releases the reserve amount to the carrier if the contract has a reserve clause.

3. Types of truck invoice factoring:

There are two types of factoring Recourse and Nonrecourse factoring.

Recourse Truck Factoring :

In a recourse factoring agreement, a trucking company/ owner-operator is not responsible for buy-back factoring invoices that aren’t paid by brokers/shippers. The brokers/shippers pay within the 30/45/60/90 day time period. This helps to factoring companies to avoid accountability for unpaid invoices from brokers/shippers due to bankruptcy or going out of business.

Recourse factoring is the most affordable option for businesses with credit-worthy clients looking to increase liquidity/ cash flow. Since you or your company has taken the risk of paying back the unpaid bills your factoring discounts/fees will lower than nonrecourse.

Factoring companies offer credit checking for all current and prospective customers. While these credit checks reduce the chance of non-payment, you are ultimately responsible for any invoices that your clients leave unpaid.

Non Recourse Truck Factoring :

A non-recourse factoring agreement takes the risk away from trucking companies if a freight broker/shipper fails to pay an outstanding invoice. 

Nonrecourse factoring protects the trucking company from the risk of customer insolvency and places the responsibility of repayment on the factor.

In non-recourse factoring companies will charge a higher fee of about 3% to 5%, the thing to note here is that the fee depends on the volume.

Non-recourse is beneficial to trucking companies who depend on few large brokers/shippers for their loads. 

Nonrecourse factoring protects truckers/owner-operators from the bad effects of a client’s nonpayment of an invoice. If you don’t want to take the risk of liability, nonrecourse factoring will suit your business.

We are going to talk about factoring traps that you may fall into if you are not careful:

Contract terms or duration is a factoring trap.:

There is a number of months (lockin period) you should work with a factoring company before you can leave them. If you leave them early there is a termination fee, which can go up to $5000 dollars if you come out of their contract early.
Avoid yearly/ half-yearly contracts go for a month to month contract
Ask the factoring company what are the terms, if you leave early is there a termination fee
You should have an easy entry and easy exit and zero termination fee.
The second factoring trap is:
Monthly minimum load volume
Minimum Factoring Value per invoice
The factor will say you need to factor with us a minimum amount of $ worth of invoices. In case you are not factoring in the minimum amount with them, you need to pay them a fine.

Minimum factoring fee per invoice that’s another trap. you must avoid it.

If you factor with a company and you submit a $500 invoice, in ordinary cases you need to pay $17.5 as a factoring fee, but here if the factor has a minimum factoring fee of $25 per invoice, you will be forced to pay $25.
An owner-operator who does short hauls needs to be mindful of minimum load volume or minimum factoring fee.

3rd factoring trap:

Hidden charges levied by the factoring companies are given below:

setup/signup free

paperwork processing charges

credit check fees

 4. How much do freight factoring companies charge?

Freight factoring charges are based on a percentage of the load or the invoice amount. The factoring rates will usually vary within the range of 1% and 5%.

5. Benefits of using a truck factoring company?

  1. Working capital optimization
  2. Credit protection against broker bankruptcy and payment delays
  3. Efficiency in sourcing new customers using up-to-date credit information and experience
  4. Credit and receivable management
  5. Cash-flow optimization
  6. More time to focus on core business operation

6. Disadvantages of using a truck factoring company

  1. The factoring company takes a cut/discount/fee from your net invoice amount. This reduces your profit margin
  2. The factor will not fund you if your company has taken a load from a broker/shipper who has a low credit rating. Here you have to be very particular on who you get loads from.
  3. On account of nonpayment of invoices/bills from a broker/shipper. You will have to bite the bullet and payback from your account if you have gone for a recourse factoring. 
  4. Some of the brokers/shippers will love to work with you directly, using quick pay, etc.
  5. Brokers/shippers or the companies that provide loads must not be forced/pestered by tele-calling or they should not feel their arms are twisted to make the payment. They should be allowed sufficient time to make the payment

What would be the factoring rate the truck factoring companies take?

The cost of factoring or factoring fee/discount/cut depends on the factoring type (recourse/nonrecourse) or the factoring company you choose. The normal rates may vary from 1% to 5% on invoices/bills discounted.

Multiple factors influence your factoring rate, including the credit score/worthiness of your customers, the credit history of your business, and the volume of invoices you’ll submit, etc.

7. Is factoring in your trucking invoices/bills worth the hassle? 

Factoring is a very vital part of the trucking ecosystem. Owner-operators will be stuck if factoring companies don’t provide liquidity/cash flow by discounting trucking invoices.

A good factoring company provides recourse and non-recourse programs increasing the flexibility of the owner-operator.

Good factoring companies provide month-on-month contracts with no strings attached. They also provide robust customer service. They don’t charge hidden fees, no monthly minimum, no setup fee, no termination fee, no minimum funding fee, etc.

Factoring is a very important element in the trucking/transportation ecosystem. Here in this article, we have covered types of factoring. factoring- advantages and disadvantages, how does a factoring company charge, is it worth the hassle to factor.

We also cover reasons why cash is king and how trucker/owners operators can benefit while a factoring company induces a fresh dose of liquidity/cash.

See more on how to select a factoring company in 2021?

Other urgent requirements for a owner operator

Firstly, you need a good insurance agency/provider covering you for various circumstances/policy types. You need to take 3rd party liability, cargo, uninsured motorist, trailer/equipment insurance.

Lastly, we need to enlist a factor who has competitive rates and above par service quality to make your business financial bottleneck free . This will help you to have a good cash flow and working capital.