What is Freight Factoring?

Freight factoring is a form of business financing in the transportation industry. It helps brokers and carriers improve their cash flow by financing their invoices from clients that pay slowly. Factoring provides companies with the funds to operate and grow to their full potential.

How Freight Factoring Works

The factoring process is simple and easy to understand. Your company finances its invoices by selling them to the factoring company. The factor pays you immediately for the invoices, which give you immediate funds to run the business.

Single installment transactions

The simples form of transportation factoring are single instalment transactions. The factors give you a single payment which is also called a “full advance”. These plans are offered with a flat-rate fee.

The advance is usually 95% to 98.5% of the invoice and is deposited to your bank account or fuel card when the invoice is factored. The remaining 1.5% to 5% that was not advanced becomes the fee for the service. Single installment plans are usually more expensive than two-installment plans. However, they provide more cash up front.

Two installment transactions

Two-installment transactions are more common among midsize and larger carriers. These transactions split your fund advances into two payments.

Recourse vs. Non-Recourse

Factoring programs are offered with resources and without recourse. In a recourse transaction, the factor can return the invoice to you for reimbursement if it is not paid within 90 days.

In a non-recourse transaction, the factoring company takes the loss if your invoices do not pay due to an insolvency by your customer. If your shipper does not pay because of a dispute, you still need to reimburse the factor for the advance. Non-recourse plans have a higher cost to compensate the factor for the extra risk.

Non-recourse is not better than recourse and not a solution to deal with risky shippers. Factors will not finance invoices from questionable shippers regardless of recourse.

Is Factoring Right for You?

Factoring is a great solution but it only solves one problem. It helps carriers with cash flow problems due to slow-paying shippers and brokers. Factoring may be right for your company if you:

• Have creditworthy shippers
• Wait up to 60 days for payments
• Need funds sooner to pay for business expenses

Advantages of Factoring

There are numerous advantages to factoring your transportation companies. Here are some of the most important ones:

• Improves cash flow: this is the most important benefit and the main reason carriers and brokers sign on to factor their fright bills.
• Fuel advances: fuel advances are a great benefit for newer carriers that are low on funds. They can also help carriers that are growing faster than their cash reserves allow.
• Easier than other options: most companies that apply for factoring have a good chance of getting it.
• Quick approvals: most factoring requests get approved within a day of getting an application.
• Available to new carriers: factoring is available to new carriers and can start helping you as soon as you pull your first load. It can help a trucking company become successful.
• Helps you grow your company: you won’t have to turn down clients because you don’t have the funds to run your business.

Qualification Requirements

The qualification requirements for this program are simple. Your transportation company must:

• Be a carrier or freight broker
• Have the proper documents, authorities, and licenses
• Work with creditworthy shippers
• Have freight bills that are free of liens

The Bottom Line

For many freight companies, freight invoice factoring is a way to outsource accounting functions and collections, ensure steady cash flow and streamline business operations.

The key is to evaluate all the facts before you get started and look at what is right for you and your company. now your creditworthiness and that of your customers. Remember, if your customer does not pay on time, you could still be held responsible for that invoice, so structure your finances accordingly. And finally, get work from a diverse group of brokers to make sure you are not overly dependent on one or two large customers.