Freight factoring is a popular financial tool for trucking companies of all sizes. This guide will explain all you need to know about freight factoring. It will cover how it works, its benefits, costs, and how to pick the best trucking factoring company for your business.
What is Freight Factoring?
Freight factoring is also called trucking factoring or transportation factoring. It is a financial service tailored for the trucking industry, providing immediate cash flow solutions. It involves selling unpaid invoices to a factoring company. The company then advances a large part of the invoice’s value to the trucking company. This setup allows trucking businesses to receive payment immediately upon delivery. Rather than waiting for the typical 30-90 day payment cycles of their clients.
It’s a vital tool for managing cash flow. Ensuring that trucking companies can cover operational costs, such as fuel and maintenance.
Here’s a quick overview of how it works:
- A trucking company delivers a load and sends the invoice to the freight broker or shipper.
- Rather than waiting 30-90 days for payment on the invoice, the trucking company sells the invoice to a trucking factoring company at a discount.
- The factoring company then collects the full payment from the broker or shipper when it comes due.
- This provides the trucking company with immediate cash flow to pay expenses and drivers.
- Freight factoring accelerates cash flow by allowing trucking companies to get paid quickly, rather than having to wait weeks or months. It does not add any debt to the trucking company’s balance sheet.
Benefits of Freight Factoring
There are many advantages to using trucking factoring companies:
- Immediate cash flow – Get paid within 24 hours instead of waiting 30-90 days. This improved cash flow allows you to grow your business.
- No debt – Factoring is not a loan so it doesn’t add liabilities or affect your credit score.
- Fuel advances – Many factoring companies offer fuel cards and advances to help with upfront costs.
- More loads – Faster payment lets you take on more loads and grow your business.
- No credit checks – Most factoring companies don’t check personal or business credit for approvals.
- Back-office support – Let the factor handle invoicing, collections, credit checks on brokers.
- Flexible contracts – Choose between month-to-month or long-term contracts.
How Much Does Freight Factoring Cost?
Trucking factoring companies charge a fee that is typically a percentage of the invoice, often between 1-5%.
Here are some of the common freight factoring rates:
- 1-3% for larger companies with great credit customers
- 3-5% for smaller companies or those with riskier customers
- Fuel advances at LIBOR + 2-4%
- Same day funding fees around $10-$15 per wire
- Monthly minimums around $10,000 – $25,000
The rate you pay usually depends on:
- Time in business
- Credit of customers
- Monthly volume
- Contract terms
Ask about any extra fees too. These include wire, invoice processing, and due diligence fees. Legitimate factoring companies will be clear about their rates and fees.
Recourse vs Non-Recourse Factoring
When considering freight factoring, it’s important to understand the difference between recourse and non-recourse factoring:
Recourse Factoring: In this type, the trucking company is responsible if the broker or shipper doesn’t pay. It typically offers lower fees but carries more risk for the trucking company.
Non-Recourse Factoring: Here, the factoring company assumes the risk of non-payment. While it usually comes with higher fees, it provides more protection for the trucking company.
The choice between recourse and non-recourse factoring depends on your risk tolerance, the reliability of your customers, and your cash flow needs. Each option has its pros and cons, and the best choice varies based on your specific business situation.
Choosing the Best Freight Factoring Company
When selecting a freight factoring company, look for:
- Quick funding (within 24 hours)
- No hidden fees
- Solid customer service
- Flexible month-to-month contracts
- Competitive rates
- Discount programs that reduce your factoring costs
- Additional services like free credit checks, fuel cards, etc.
Avoid any freight factors that:
- Charge you back for non-payment
- Have lengthy contracts
- Don’t clearly explain rates and fees
- Have Monthly minimums
- Take a long time to pay out invoices
Reputable freight factoring companies want to help your business grow and will be transparent every step of the way.
Is Freight Factoring Right for You?
Freight factoring can benefit almost any trucking company by improving cash flow. It allows you to grow your fleet and take on new drivers. Make sure to partner with a reliable factoring company that offers competitive rates, quick funding, and great service.
We review the best freight factoring providers based on thousands of customers’ experiences, find out the best factoring providers here.