Freight factoring, also known as transportation factoring or trucking factoring, is a service option that can help trucking companies streamline their cash flow. But how does freight factoring work, and is it the best choice for your company? Join us for a solid overview of what it is, how it works, and the pros and cons you should consider to decide whether freight factoring is the right option for you.
What Is Freight Factoring?
One of the easiest ways to understand freight factoring is to understand the problem it solves for those in the trucking industry. If you run a trucking business, you likely submit an invoice to your clients each time you complete a delivery they’ve ordered. They’ll then pay the invoice, but usually not right away. In fact, it’s common for it to take anywhere from 30- 90 days to get paid for trucking deliveries.
This can make it incredibly difficult to pre-plan your budget, as you never quite know how much money you have coming in the short term. That’s where freight factoring comes in.
In simple terms, freight factoring involves selling your invoices to a third party for a slightly reduced rate. In exchange for taking a slight pay cut, the freight factoring company will pay you for each invoice right away. They’ll then handle the collection process from the actual client, who will reimburse them for the invoice.
This allows you to focus on other aspects of your business without having to worry about making sure you get paid for jobs you may have completed weeks ago. It can also go a long way towards taking the guesswork out of your monthly budgeting.
The Freight Factoring Application Process
In some ways, finding the right freight factoring company is a bit like applying for a credit card. Rather than simply signing up, a trucking business needs to go through an application process to determine whether they qualify. This process will also determine things like how much of a fee the factoring company will charge and the percentage of each invoice they’re willing to advance before payment.
These factors are usually determined based on things like:
- Your average volume and customer base
In general, the more business you do, the lower your rates will be. Factoring companies also tend to look more favorably on a diversified client base, given that it can be riskier to count on payment from just one or two clients.
- Your customers’ creditworthiness
Your customers’ reliability at making payments on time will also come into play. Sometimes, a factoring company may agree to cover the invoices of some but not all of your clients if certain customers look to be too risky.
- Percentage of each invoice to be advanced
If you only need a certain percentage of each invoice upfront to keep your business running, sometimes you can get a lower rate by only asking for an advance of 85- 95% of each invoice until it’s paid.
- Non-recourse vs. recourse factoring
There are two different types of freight factoring: non-recourse and recourse. With a non-recourse agreement, a trucking company is not held liable if a shipper or broker doesn’t pay on time or fails to pay at all.
Factoring companies usually do credit checks to avoid these scenarios but will take the hit if they happen under a non-recourse agreement. Under a recourse agreement, however, a trucking company is held responsible if the customer doesn’t come through with their payment and will have to cover the debt.
Pros and Cons of Freight Factoring
Freight factoring can come with plenty of benefits as long as you take the time to find the right company to work with. Freight factoring can save you valuable time by handling everything from collections to client credit checks. Some factoring companies even provide other perks, such as discount fuel programs.
You can generally get approved by a factoring company within a business week and begin enjoying flexible advance options. For instance, if you only need a certain amount to keep your business running, you can ask for advances on as few or as many company invoices as they agree to cover. Another perk is that it’s possible to enjoy low rates even if you have questionable credit. When it comes to factoring, it’s your customers’ creditworthiness that counts rather than your own.
What about the cons? One of them is obviously that freight factoring isn’t free, so you need to make sure that the rate a company offers you is worth their services. Depending on your circumstances and the company you choose to work with, you may end up paying higher fees than you would on a traditional line of credit. However, this is not necessarily always a bad thing, as long as the freight factoring company makes up for it by providing more services than you’d get from a traditional lender.
Additionally, you’ll want to carefully consider the terms of a recourse agreement, as they come with the possibility of taking a hit from a bad customer. Last but not least, it’s vital to keep in mind that not every factoring company is created equal. This is where taking the time to really do your research can pay off in the long run. Make sure to read the fine print and research the company’s reputation to ensure that you don’t fall prey to hidden fees or sketchy customer service.
What to Look for in a Freight Factoring Company
When comparing potential freight factoring companies to work with, it’s important to consider more than just low rates. Here are several other important questions that should factor into your decision.
- How high is the max credit line?
Many freight factoring companies will put a limit on how much money they’ll advance you at a time, similar to the available balance on a credit card. Make sure the max credit line you’re offered works with your budget.
- Advance percentage
What percentage of each invoice will the company pay you immediately? Will you get the full amount upfront, or will a percentage be held in reserve until each invoice is paid?
Avoid nasty surprises by making sure hidden fees don’t stay hidden. Does the company charge set-up, transaction, invoice submission, or administrative fees? If a customer takes longer than a certain number of days to pay, will you be charged “aging fees?” If so, how many clearance days does the company factor into their check payment policy, and will they factor into the aging fees?
- Delivery speed
When can you expect payment, and is there a cutoff time by which invoices must be received to avoid delays?
- Contract terms
How long will you be tied to the contract, and is there a fee for terminating early? If you want to terminate your contract, how much advance do you need to give? Will unpaid client invoices affect the validity of your termination?
We hope this information has proven helpful in understanding freight factoring and whether or not it’s right for your business.