Freight factoring: What is it and how does it work?
As a trucking owner-operator, one of your biggest responsibilities is staying on top of your cash flow and making sure that your bills get paid. However, shipping clients often take 30 days or more to pay invoices after a load is completed, which can leave you in a lurch when it comes to handling your expenses.
This is where freight factoring comes in. Working with a third-party freight factoring company ensures that you’ll receive your payout in a timely manner, regardless of when your client pays. Here’s everything you need to know about freight factoring and how to leverage it for your trucking business.
What is freight factoring and how does it work?
Freight factoring gives trucking companies a way to get paid quickly. Instead of waiting weeks or even months for clients to pay invoices, trucking companies can sell those invoices to trucking factoring companies.
The freight factoring service will pay the invoice right away, giving you access to your funds within just a few days. In exchange for this service, the freight factoring company will take a percentage of your invoice, and they may charge additional processing fees on top of that. Many factoring companies will also hold a certain percentage of your invoice as collateral and will pay back the reserve (minus fees) when your client pays.
What are the pros and cons of using freight factoring for your trucking company?
Before you commit to using freight factoring services for your trucking company, you’ll need to weigh the pros and cons. The biggest advantage of using freight factoring is that there’s no uncertainty about when you’ll get paid, which allows you to confidently plan ahead for future bills. Freight factoring prevents trucking companies from having to rely on credit cards or bank loans to cover their expenses when clients are slow to pay invoices.
Unlike credit cards and other lending products, freight factoring companies usually have a simple, straightforward application process. The factoring company will evaluate your customers’ finances and creditworthiness rather than focusing on yours. Since you’re not taking out a loan, you won’t have to worry about freight factoring compromising your credit score.
The biggest downside of using freight factoring is that you won’t receive the full invoice amount. Factoring companies will take fees out of your invoice, and you’ll need to factor them into your expenses when planning ahead.
What are the different types of freight factoring and which one should I choose?
There are two different types of freight factoring services - recourse and nonrecourse. Recourse factoring means that you’re liable for the debt if your client doesn’t pay within a pre-specified time frame. Nonrecourse means that the factoring company absorbs the loss and you won’t be held liable.
Recourse factoring is riskier for trucking companies, but it’s also much more common and more accessible. If you’re using recourse factoring, you’ll need to plan ahead to make sure you can buy back the invoice in the unlikely event that your client doesn’t pay up within a few months.
Nonrecourse factoring is less common - many factoring services don’t offer it at all. In order to qualify for nonrecourse factoring, you’ll typically have to prove that your customers consistently pay on time and have financially sound operations.
How do factoring companies determine advance rates and fees?
Before taking on your invoices, factoring companies will assess your customer base by looking at how many clients you have, how long they typically take to pay, and their general creditworthiness. Some companies will offer lower rates if you sell a high volume of invoices to them at once.
If a freight factoring company deems your invoices to be “risky”, they might charge a higher fee or limit your advance rate. Alternatively, if you can afford to take a lower advance rate, the factoring company might lower your fees.
What is the application process for freight factoring, and how long does it take to get approved?
Before you accept shipments, let your clients know that you plan on using a freight factoring service so they can prepare. After the shipment is completed and you receive the invoice, send it to the freight factoring company to start the application process. They’ll verify the invoice with your client and assess the invoice’s risk level.
After the freight factoring company reviews the invoice, they’ll inform you of the advance rates and fees that you qualify for. The entire approval process usually takes 24 hours or less.
How quickly will I receive funds after submitting an invoice for factoring?
This will depend on which freight factoring company you work with and their internal timelines. However, you can generally expect to receive payment within a few days.
Are there minimum or maximum invoice amounts I can factor?
Minimum and maximum freight factoring amounts will depend on the company you work with. Some companies have no minimum or maximum amounts, while others do have financial parameters in place.
What are the credit requirements for my customers when using freight factoring services?
Freight factoring services will focus on your customers’ credit ratings when evaluating your invoice. Exact credit requirements will vary based on the circumstances, but generally your customers will need scores in the ‘good to excellent’ range in order to qualify.
Are there any long-term contracts or commitments required when using freight factoring services?
One of the biggest advantages of using a freight factoring service is that they don’t require any long-term commitments. You can opt to use factoring when you need it, and handle invoices on your own when you don’t.
Is factoring right for your company?
Ultimately, this will depend on what your expenses are and how long your clients typically take to pay invoices. For many trucking companies, the additional fees that come with freight factoring are well worth the convenience this service provides. Think of freight factoring as a helpful tool to support your business and reduce invoice-related stress.
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