Freight factoring―also referred to as trucking factoring―is a form of invoice factoring that allows transport companies, including owner-operators, to turn unpaid invoices into immediate cash. Freight factoring is a good option for owner-operator trucking companies that want to get paid immediately for work they have already done to be able to take on additional work. Larger companies may choose a factoring company when they want to outsource their accounts receivables or need immediate payment on outstanding invoices for working capital.
Freight Factoring Overview
Amount You Can Borrow
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Invoices due within 90 days
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For businesses that need a provider, we ranked the best factoring companies for trucking.
How Freight Factoring Works
- You invoice your customer: The freight factoring process begins with you issuing an invoice to your customer for work performed. There must be an outstanding invoice to your customer before you can start the freight factoring process as the invoice is the basis for the factoring agreement.
- You assign invoices to a factoring company: Larger volume factoring, also known as contract factoring, requires you to sell and assign all of your invoices to the factoring company for them to collect. Low volume factoring, or spot factoring, typically works more like a line of credit and allows you to pick and choose which invoices to factor. However, the arrangement may vary based on the provider you are working with.
- The factoring company pays your advance: Once you have selected the invoices that you will factor, the factoring company pays you for a percentage of the value of the invoices. The amount that you are paid depends on the advance rate that you agreed to with your factoring company, which is usually 80% to 90%. The first payment may take a few days as your account gets set up; subsequent payments are typically issued within 24 hours.
- Your customer pays the freight factoring company directly: Your customer pays off the invoice by paying the trucking factoring company directly. Most often, these payments are sent to a lockbox in your name and made payable to you. However, the factoring company controls both the lockbox and the deposit account. Using contract factoring, the responsibility for collecting customer payment is shifted entirely to the factoring company.
- Factoring company pays you remaining balance minus fees: The factoring company, at this point, will take their fees out of the customer’s payment and forward you the remainder. While this is typically how invoice factoring works for transportation companies, you can see that there are some slight differences based on your factoring volume.
Freight Factoring Rates, Terms & Qualifications
The rates, terms, and qualifications for freight factoring vary based on the size of your company and the value of the invoices that you are factoring. Larger trucking companies might factor all of their invoices via contract factoring while smaller trucking companies are more apt to utilize spot factoring and only factor select invoices.
Freight Factoring Rates
- Amount factored: $1,000 to $20 million per funding event
- Average discount rate: Starting at 0.25% per week
- Additional fees: May include one-time origination fee or fees for failing to meet minimum factoring requirements
The rates charged for freight factoring differ depending on whether you utilize contract factoring or spot factoring. Smaller companies can expect to pay discount rates ranging from 2% to 5% of the amount factored, while larger companies can expect 0.5% to 5%. You may also be charged an origination fee when you first set up your account with the factoring company.
Freight Factoring Terms
- Factoring type: Contract factoring, with some spot factoring available
- Advance rate: 90% typically, but can range from 80% to 95%
- Repayment terms: 30, 60, or 90 days
- Recourse or nonrecourse: May be either recourse or nonrecourse depending on the provider
The terms for freight factoring vary based on the value of the invoices factored. Contract factoring requires factoring of all invoices while spot factoring allows you to choose which invoices to factor. The advance rate is the percentage of the invoices’ value that the factoring company will pay out upfront before the invoice is paid.
- Spot factoring: An agreement that includes spot factoring allows you to choose which of your invoices you want to include in the factoring; with spot factoring, you are not required to factor all of your business invoices
- Contract factoring: An agreement involving contract factoring requires that all of your customer invoices be factored with the factoring company
- Recourse: If your factoring agreement is a recourse agreement, you are agreeing to “buy back” any of your customer invoices that are not paid by your customers; this may also include additional fees charged by the factoring company
- Nonrecourse: With a non-recourse agreement, you are not responsible for the invoices that your customers fail to pay; due to the increased risk to the factoring company in a non-recourse agreement, the rates charged by the provider are often higher
Freight Factoring Qualifications
- Customers: Creditworthy customers; their credit score may be pulled
- Invoices: Outstanding invoices due in the next 90 days
- Time in business: Three or more months of business history
- Annual revenue: $100,000 or more
Qualifying for freight factoring is much easier than trying to qualify for a traditional business loan. Factoring companies are more interested in your customer’s creditworthiness than your credit because the factoring company is going to collect payment from your customers to repay the advance that you received.
Pros & Cons of Freight Factoring
Pros of freight factoring include:
- Funding is quick: With most freight factoring companies, you can receive funds for factored invoices in as little as one day, which is much faster than most conventional financing.
- Qualifying is easy: Because freight factoring relies primarily on the creditworthiness of your customers, the qualification requirements for your business are minimal.
- Financing grows with your business: With the amount of the advance determined by the value of the invoices that you factor, the more your business grows, the more financing you can get through freight factoring.
Cons of freight factoring include:
- It’s an expensive option: While freight factoring provides you with cash upfront on your unpaid invoices, a percentage of those invoices―the discount rate―is retained by the factoring company, reducing the amount that you receive for the work that you have performed.
- Costs increase if the customer doesn’t pay: If you have a recourse factoring agreement, and your customer doesn’t pay the invoice, you may have to buy back the invoice, and you will likely be charged a fee.
- Customer payments made directly to the factoring company: In many cases, by using freight factoring, you are essentially assigning your accounts receivable functions over to the factoring company; this is especially true for contract factoring agreements, where you agree to have all of your invoices included in the factoring.
Freight factoring may be a good option for either high-volume trucking companies or small owner-operators with just one truck. You can use this financing method to overcome cash flow gaps or to help you take on additional projects more quickly. The right freight factoring company depends on the size and needs of your business.