Cash Flow

How Does Transportation Factoring Work?

Posted by Factor Funding Staff on March 9, 2022

how does transportation factoring work

Nearly 7 million people work in the trucking industry
, helping to move trillions of dollars worth of products each year. However, many transportation companies struggle with delayed invoice payments while still covering ongoing expenses such as fuel and payroll.

Transportation factoring can help your transportation company meet all its financial needs and help you grow your business.

What Is Transportation Factoring?

Transportation factoring is a funding method in which a freight business sells its invoices at a discount to a factoring company. The factoring company purchases the invoices and pays up to 97% of the face value in cash within 24 hours or less. 

The factoring company takes on the responsibility for collecting the invoice. Once it’s paid, the factor pays the freight business the balance minus a small fee. 

Factoring your invoices means you get paid almost immediately instead of waiting for your customer to pay in 30, 60, or 90 days. Factoring also relieves your business of back-office administration dedicated to collecting and processing invoices. 

There are two types of factoring — recourse and non-recourse. The difference is in who is responsible for unpaid invoices.

  • Recourse factoring - the transportation company is responsible for unpaid invoices
  • Non-recourse factoring - the factor is responsible for unpaid invoices

Recourse factoring provides the benefit of lower rates since the factor has no liability for customers in default. Large companies often benefit more from recourse factoring because they typically have large cash reserves and can absorb bad debt expenses when a customer doesn't pay.

Non-recourse factoring doesn't remove all liability from the transportation company. Still, it does provide protection from customers who declare bankruptcy or go out of business. How much liability the factor retains for bad debt depends on the factoring company and the contract terms. 

You will pay higher fees for non-recourse factoring to cover the liability. It's still a good option for small to medium-sized trucking companies, especially owner-operators, that do not have the reserves to cover unpaid invoices out of pocket.

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You Don’t Hire a Factor, You Apply to One

Since factors take on a good bit of liability, they manage risk by checking credit. Not your credit — your customers’ credit. 

Factors check the creditworthiness of your customers before accepting an invoice for factoring. They make their money directly from your customers, so this is a way to assess risk. This does make it easier for you to finance your company if you have bad credit yourself.

Typically, a factor wants to know a few details about your business before approving your application:

  • What is your monthly invoice volume?
  • How large is your customer base?
  • How many days does it typically take your customers to pay?
  • How much of the invoice value do you need to continue your operations?

Large invoice volumes and lower advances will get you lower rates on factoring. Most factors offer multiple options in setting up factoring for your transportation business.

How Factoring Works for Trucking and Freight Companies

Once you deliver a load, you submit your rate confirmation and Bill of Lading to the factor. Most factors provide an online portal for creating and submitting invoices, bills of lading, and rate confirmation.

The factor verifies a clean delivery with the brokerage and performs a credit check to ensure the customer’s invoice qualifies for factoring. With a long-term factoring relationship, the factor may already have completed this step.

Once the delivery is verified and the credit check is done, the factor deposits a payment of up to 97% of the face value of the invoice into your account via ACH overnight, by wire transfer in under an hour, or into a fuel account instantly.

The factor then becomes responsible for collecting for the lifetime of the invoice. Once the factor collects payment in full, the invoice is marked closed, and the balance is forwarded to you minus any fees. If the customer defaults, you may be required to buy back the invoice, returning the advance you received.

Factoring rates vary based on invoice or business volume. Fees can range from 1.5% to 5% per invoice, depending on your contract terms and conditions. Some factors also charge an initial setup fee for your first invoice. Your factor may charge a flat fee regardless of other elements of your business volume and customer credit history.

Two other terms to know are spot factoring and contract factoring.

  • Spot factoring is the practice of picking and choosing which invoices you wish to factor. You don’t need to factor all invoices.
  • Contract factoring sets a rate based on factoring all invoices.

Talk to the factoring company before signing a contract to decide which option is best for your situation.

The Benefits of Factoring for Your Trucking Company

According to the American Transport Research Institute, the average cost to run a truck is $66.65 per hour, fluctuating with the price of fuel and other expenses. To keep your trucks running, you may experience feast and famine as you wait for your customers to pay your invoices up to three months down the road. 

The average number of days for brokers and shippers to pay their carriers and for those payments to be processed is 30 to 45 days, and about 60% of invoices are paid late.

When you factor your invoices, you create a steady revenue stream without the need to perform collections. You get most of your money the same or the next day. The factoring company follows up on invoice payment, even when customers pay late. You don't become involved again unless a customer defaults.

Now you have the cash flow for fuel, repairs, daily expenses, and business growth. You have a source of unlimited capital that grows with your sales, and if you have a bad credit report, there's no problem. Unlike a traditional bank loan or credit card, you don’t pay interest on a balance.

Ready to solve your cash flow problems? Get a free, no obligation factoring  quote today >>

Depending on your contract, you only factor the invoices you want with no minimum volume requirements. You can stop using credit cards and loans to tide you over and saddle you with additional payments and more administration.

Many factors retain lists of brokers, shippers, and other customers that have already passed their credit check. You can access the list to find customers that are pre-qualified for factoring. You may also be able to get the factor to perform a credit check on customers you bring to them, qualifying your customer and helping you avoid deadbeats.

Factoring is a low-cost, quick, and easy way to maintain a steady cash flow and reduce your administrative overhead. For owner-operators, the factor is your banker and back office, where you get paid almost immediately after delivering a load.

Does factoring sound like a good fit for your business? Contact Factor Funding today to learn more. We can’t wait to help your business grow.

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