Freight Factoring Companies: How to Choose the Best

One of the most significant priorities for any small trucking business is cash flow. Most clients will pay outstanding invoices 30, 60, or even 90 days after the load is completed. But what about the expenses you have to pay in the meantime to continue running your company?

Some expenses like fuel, maintenance, and insurance can’t be put off that long. This is why many trucking businesses partner with a factoring company.

What is freight factoring? How do you choose from the many freight factoring companies out there? What do you do if you need to switch freight factoring companies? Keep reading to get the answers and find out if working with a factoring partner is right for you.

How does freight factoring work?

A factoring company essentially buys unpaid invoices. Oftentimes referred to as “accounts receivable financing,” top factoring companies pay carriers the invoice amount quickly, usually within 24 hours once the invoice has been verified. They then collect that same unpaid invoice balance from the broker when they payout.

A good factoring company will offer options. They won’t have any minimum number or dollar amount of invoices you must factor. You can choose which ones to factor, they charge flat rates, and there are no cancellation charges or long-term contracts.

You can tailor factoring based on your needs. Some business owners factor all their invoices regardless of how fast brokers pay. Others only factor some, usually for slow-paying customers or on an as-needed basis.

Factoring with a broker can be beneficial for small businesses because:

• Your credit score matters less than the credit score of your clients and customers.
• You get paid right away.
• How much you “finance” grows as you factor more invoices from your customers.
• The more invoices you factor, the lower your rate may be.
• Some factoring companies offer other back-office accounting services, such as accounts payable and human resource management for a small fee.

Factoring puts cash in your pocket so you can use it for payroll, fuel, and other short-term expenses. It also relieves some of the administrative burdens of chasing down payments. For this reason alone, many smaller businesses factor all of their invoices.

Recourse vs. non-recourse factoring 

What happens if your customer pays the factoring company very late, or not at all? The answer depends on the type of factoring you choose. Factoring companies may offer one of two types of factoring: recourse and non-recourse.

Recourse Factoring 

In recourse factoring, if a customer doesn’t pay an invoice, you must “buy it back” from the factoring company and seek payment on your own. In other words, you are ultimately responsible for any non-payment.

Non-Recourse Factoring

With non-recourse factoring, the factoring company assumes responsibility for the debt and collecting it; however, there are some restrictions:

• Some factoring companies only offer non-recourse protection if your customer goes bankrupt or becomes insolvent.
• Invoices from high-risk companies with low or no credit scores cannot be factored.
• Some companies may charge higher fees associated with non-recourse factoring.

Non-recourse factoring can be beneficial if you understand the restrictions. Some factoring companies have their own credit teams and can protect you from working with clients with bad credit. Either way, a good factoring company should make diligent efforts to collect all invoices you choose to factor.  Truckstop offers non-recourse factoring. You still get paid, even if the broker doesn’t pay!

For more information on recourse vs. non-recourse factoring, watch our helpful video

How much do freight factoring companies charge?

Factoring companies charge a factoring fee, which is usually a flat percentage of each invoice you factor. Generally, fees range from 1.15% to 3.5% per month. This can vary based on the type of factoring you choose and the number of invoices (and dollar amounts) of each invoice you factor.

It’s essential to pay attention to the fee structure when you talk to a factoring company. Some factoring companies may charge additional fees for some services, including:

• The amount or number of invoices you are factoring
• Aging (length of time invoices are outstanding)
• The credit quality of customers
• Money transfers
• Operations costs
• Collections costs
• Advances

Some trucking factoring companies require minimum monthly volumes. If you fail to meet these volumes, you might be charged additional fees. If you terminate your factoring agreement before the end of the contract, you may be charged a termination fee.

The primary thing to keep in mind is that the factoring company you work with should be transparent and upfront about any of these fees. If you see unexpected hidden fees taken out of your invoices, that’s a red flag to investigate. Those fees come directly out of your profits, so you want them to be as predictable and reasonable as possible.

Benefits of freight factoring

No matter how large or small your trucking business is, invoice factoring can contribute to your success in many ways:

• Faster access to payments. The factoring process gives you rapid access to cash. Freight factoring allows you to cover short-term operating costs without having to wait or worry about collections.
• Overcome credit challenges. When evaluating invoices, a factoring company will look at the creditworthiness of the broker or shipper rather than your credit rating. So, if you have any credit blemishes on your trucking business record, you can still get access to cash quickly.
• Direct payments to fuel cards. Some factoring companies may pay invoices directly to fuel cards and offer discounts to those in the trucking industry.

How do factoring companies qualify freight carriers?

A freight factoring company will typically qualify freight carriers based on a combination of numerous factors.

Monthly invoice volume

The more business you do with them and the greater the invoice value, the fewer fees you will be charged as a percentage.

Customer diversity

If you handle freight for a single company or a small group of brokers or shippers, a freight factoring company will examine the risk. A diverse customer base lessens that risk.

Customer credit risk

Customer credit risk: Companies will evaluate the creditworthiness of the company you have invoices for, including how long they typically take to pay their bills.

Percentage of advance

Trucking industry factoring companies can lower their risk by advancing only a portion of your invoices. For example, paying an advance on 85% of the invoice rather than the total can help you get a better rate.

How do you choose the best factoring company?

There are many factoring companies out there, and choosing one can be a challenge. The key is to choose the best fit for your unique circumstances. Just as you would interview a new employee, ask these questions of your factoring company.

The factoring process

• Which invoices can I factor and which invoices are ineligible? This may depend on your customers and their credit scores, so have a list ready.
• Can I factor some invoices and not others? Usually, you can, but make sure. Some companies require you to factor every invoice.
• How much can I borrow at any one time?

Factoring payments and fees

• How quickly will I get paid when I submit an invoice? The answer should be within 24 hours.
• What are your factoring fees? Preferably, it’s a flat fee. Some factoring companies often offer a discount or low rates if you factor more invoices.
• Are there any other fees I should be aware of? (Money transfers, collateral, etc.) Make sure you are clear on these fees and they fit within your budget before you sign any agreement.
• What happens if a customer does not pay an invoice within a reasonable time?
• What is the time limit for customers to pay invoices?
• Do you charge an “aligning fee” if customers take longer to pay?
• Is there a factoring fee for transactions, such as sending money to my account? Are there minimum volume fees?

Contracts and terms

• Is there a long-term contract? If so, how long is it, and what are the terms? Are there termination fees?
• Do you require a reserve account?
• Do you offer recourse or non-recourse financing? Recourse loans offer lower fees, but you will have to refund payments if the customer does not pay. With a non-recourse loan, the factoring company assumes all of the risks if the customer doesn’t pay and will charge higher freight factoring fees.

Experience

• How long have you been in business?
• Do you have experience working in the freight industry?
• Do you have experience with freight companies my size?

How to switch freight factoring companies

Here are six simple steps to switch to a new freight factoring company:

1. Carefully examine the terms of your current factoring agreement.
2. Choose a new factoring provider.
3. Inform your current provider of your decision to switch.
4. Sign a new agreement with your selected factoring company.
5. Notify your customers about the change in factoring services.
6. Ensure adequate time is allocated for a smooth transition.

Need more details on the process of switching freight factoring companies? Check out this helpful Truckstop article.

Get paid when you need the money.

Truckstop has offered simple, easy-to-use freight factoring services for 20 years. We offer flat fees, non-recourse factoring, full-service billing, flexible cancellation, and no minimum volume requirements. You can even get paid within 24 hours*.

And now, we’re making our freight factoring even better. Using the NEW Broker Factorability Data on the Truckstop Load Board, you can instantly see if a load is factorable right in the load summary, saving you time and increasing your chances of getting the loads you want.

With Truckstop, you get paid on invoices when you need the money. Want to learn more about our freight factoring services and how they can work for your company? Request a demo today. We’re here to answer your questions, help make sure your business runs smoothly, and get you closer to your financial goals.

*Time varies based on your financial institution. Payment within 24 hours begins once the load is verified.