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WHAT IS FACTORING?

What is Freight Factoring?

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Understanding Factoring - A Trucker's Guide

Running a trucking business comes with many challenges, especially when it comes to managing cash flow. One of the best tools to keep your business running smoothly is freight factoring. But what exactly is freight factoring, and how can it help you? Let’s break it down.


Here’s how it works :

Freight factoring, also known as trucking factoring or invoice factoring, is a financial service that helps trucking companies get paid faster. Instead of waiting 30, 60, or even 90 days for a customer to pay an invoice, you can sell that invoice to a factoring company and get most of your money right away. 

 

In the trucking world, you know how important it is to be paid on time. When utilizing a good factoring company, you no longer have to wait those 30, 60, or 90 days to get paid. You as a business can sell your invoice to a factoring company, and get same day funding on your entire invoice, minus a factoring fee. That can be as low as 0.65% of the total invoice. Once your invoice is sold to the factoring company, they will then handle all of your collections for you. Typically, you will have access to a portal from the factoring company that will give you access to view your aging report. 

How Can Factoring Help Your Business?

Improved Cash Flow

When using a factoring company, you don’t have to wait weeks or months to get paid. This means you can pay for fuel, maintenance on your truck, and other expenses on time. Quick access to cash ensures that your business operations run smoothly without financial hiccups.

Grow Your Business

Steady cash flow allows you to take on more loads, hire more drivers, and expand your operations. With the financial stability provided by factoring, you can focus on growing your business rather than worrying about unpaid invoices.

Avoid Debt

Instead of taking out loans or using credit cards with high interest rates, freight factoring provides immediate cash without adding debt to your business. This keeps your financial health intact and helps you avoid the pitfalls of borrowing.

Simplified Billing

Many factoring companies handle the collection of payments from your customers, saving you time and hassle. This means you can concentrate on running your business while the factoring company takes care of getting you paid.

How to Choose the Right Factoring Company

Not all factoring companies are the same, so it’s important to choose one that meets your needs. Here are some things to consider :

Fees and Advances

Look for competitive rates and high advance percentages. Factoring fees typically range from 1% to 5% of the invoice value, depending on factors such as your customers’ creditworthiness, your business’s monthly volume, and the terms of the invoices. A lower fee means you retain more of your hard-earned money. High advance percentages, often between 80% and 95%, ensure you get most of your cash upfront, which is crucial for covering immediate expenses like fuel, maintenance, and payroll.

Additionally, ask about any hidden fees or charges that might not be immediately apparent. Some companies may have additional costs for services such as wire transfers, account setup, or credit checks. It’s essential to have a clear understanding of the total cost involved to avoid any surprises or hidden fees.  

Contract Terms

Some companies require long-term contracts while others offer more flexibility. Long-term contracts might lock you into a service for a year or more, which can be restrictive if your business needs change or if you’re not satisfied with the service. On the other hand, short-term or month-to-month contracts provide greater flexibility, allowing you to switch factoring companies if you find a better deal or if your business grows and your needs evolve.

It’s also important to look for any cancellation fees or minimum volume requirements in the contract. Understanding these terms upfront will help you make a more informed decision and choose a company that aligns with your business strategy.

Customer Service

Good customer service is crucial. You want a factoring company that is responsive and easy to work with. Excellent customer service can make a significant difference, especially when you encounter issues or have questions about your account. Look for a company that offers dedicated account managers who understand your business and can provide personalized support.

Check online reviews and ask for references from other trucking companies that have used the factoring service. This can give you insights into the company’s reliability, responsiveness, and overall customer satisfaction.

Additional Services

Some factoring companies offer extra services like fuel advances, fuel cards, and free credit checks for your customers. These additional services can provide further convenience and cost savings for your business.

  • Fuel Advances: This service allows you to get an advance on a load before delivering it, providing immediate cash for expenses like fuel and tolls.
  • Fuel Cards: These cards offer discounts on fuel and can help manage fuel expenses more effectively.
  • Free Credit Checks: Checking the creditworthiness of your customers before accepting a load can prevent future payment issues. Some factoring companies offer this service at no additional cost, helping you make better business decisions for your trucking company.

Moreover, some companies provide additional tools like online account management, detailed reporting, and integration with your accounting software. These features can streamline your operations and provide valuable insights into your business’s financial health.

Freight Factoring Process

Freight factoring is a straightforward process:

  1. Deliver the Load: Complete the delivery and generate an invoice for your customer.
  2. Sell the Invoice: Submit the invoice to a factoring company, along with your rate confirmation sheet and BOL.
  3. Receive Cash: The factoring company advances a large percentage of the invoice amount (typically 80-95%, and sometimes even a full advance) to your account within 24-48 hours.
  4. Factoring Company Collects: The factoring company takes over the collection process, waiting for your customer to pay the invoice. They handle all the follow-ups and collections, ensuring that you don’t have to spend time chasing payments.
  5. Final Settlement:The factoring company will have their collections team collect the invoice, typically in 30-45 days.

Types of Freight Factoring

Freight factoring comes in different forms to meet the different needs of trucking companies. Understanding the types of freight factoring can help you choose the best option for your business. The two primary types are recourse factoring and non-recourse factoring.

Recourse Factoring

Recourse factoring is the most common and cost-effective type of freight factoring. In this arrangement, the trucking company (you) retains some responsibility for the debt.

  • Responsibility for Non-Payment: If your customer fails to pay the invoice, you must buy back the invoice from the factoring company or replace it with another invoice of equal value. This means you assume some risk, but it also typically results in lower factoring fees. The factoring company also provides some protection with offering free credit checks, which helps you stay away from non-paying clients. 
  • Lower Fees: Because the factoring company takes on less risk, the fees for recourse factoring are usually lower compared to non-recourse factoring. This can make it a more affordable option for your business.
  • Best for Reliable Customers: Recourse factoring is ideal if your customers have a good track record of paying their invoices on time. It minimizes costs while providing the cash flow benefits of factoring.

Non-Recourse Factoring

Non-recourse factoring transfers the risk of non-payment from your business to the factoring company, or does it? 

  • Risk Transfer: If your customer does not pay the invoice due to insolvency or bankruptcy, the factoring company absorbs the loss. This shifts the risk away from your business, protecting you from bad debts.
  • Higher Fees: Due to the increased risk taken on by the factoring company, non-recourse factoring typically comes with higher fees. These fees compensate the factoring company for the additional risk.
  • Non-Payment : Non-recourse factoring typically only the trucking company when the customer goes out of business/bankrupt. If a customer simply refuses to pay, no matter what the reason, you still may be held liable for the non-payment. This is why it is important to fully understand the program you are signing up for. 

Questions to When Choosing a Factoring Company

  • What are the fees and rates?

    • What is the factoring rate?
    • Are there any additional fees (setup fees, monthly minimums, wire fees, etc.)?

  • What is the advance rate?

    • What percentage of the invoice will be advanced when the invoice is purchased?

  • How long is the contract?

    • Is there a minimum contract length?

  • What are the funding and approval times?

    • How quickly will you receive funds after submitting invoices?
    • What is the typical time frame for approval?

  • Are there any hidden costs?

    • Are there any hidden fees that are not clearly disclosed within the contract?

  • How does the company handle collections?

    • Who handles the collection of payments from your customers?

  • What is the recourse policy?

    • Is the factoring agreement recourse or non-recourse?
    • Who is responsible if the customer does not pay?

  • Are there any restrictions on the types of freight invoices they will factor?

    • Are there specific types of shipments or customers that are not eligible?

  • What is the minimum and maximum funding amount?

    • Is there a minimum volume requirement?
    • What is the maximum amount they will factor?

  • How are disputes handled?

    • What is the process for resolving disputes over invoices or payments?

  • What kind of customer support is available?

    • Is support available 24/7?
    • How can you contact them (e.g., phone, email, live chat)?

  • What technology or platform do they use?

    • Is their platform user-friendly?
    • Do they offer an online portal or mobile app for managing accounts?

  • Can you see testimonials or references?

    • Can they provide references from current clients?
    • Are there online reviews or case studies available?

  • What is their experience in the freight industry?

    • How long have they been in business?
    • Do they specialize in freight factoring?

  • Are there any special terms or conditions?

    • Are there specific conditions that apply to certain invoices or customers?

  • What are the terms for additional advances?

    • Can you get additional advances on existing invoices?
    • What are the terms and fees for this service?

Freight Factoring - Frequently Asked Questions

Is freight factoring a loan?

No, freight factoring is not a loan. You are selling your invoices at a discount for immediate cash, so it does not add debt to your balance sheet.

How much does freight factoring cost?

Fees for freight factoring typically range from 1% to 5% of the invoice amount, depending on factors such as your customers’ creditworthiness, your business’s monthly volume, and the terms of the invoices.

How quickly can I get my money through factoring?

Most factoring companies provide funds within 24-48 hours after submitting your invoice.

Can new trucking companies use freight factoring?

Yes, freight factoring is an excellent option for new trucking companies that may not have established credit or a long payment history. It provides immediate cash flow to support your operations from the start

What are the advance rates in freight factoring?

Advance rates typically range from 80% to 95% of the invoice amount. Here at TMG, we offer 100% advance rates. The factoring company advances this percentage to your account within 24-48 hours of submitting the invoice.

Are there any additional services provided by factoring companies?

Yes, many factoring companies offer additional services such as fuel advances, fuel cards, and free credit checks for your customers. We also offer equipment financing and a load board. These services can provide further convenience and cost savings for your business

How does freight factoring affect my customer relationships?

Factoring can positively impact customer relationships by allowing you to focus on delivering excellent service while the factoring company handles collections. However, it’s important to choose a factoring company that handles collections professionally to maintain good relationships with your customers.

Will my customers know I’m using a factoring service?

Yes, typically your customers will be informed because they will pay the factoring company directly. Clear communication and transparency are key to ensuring your customers understand the arrangement and continue to receive excellent service from your business.

Can I still choose which invoices to factor?

Yes, many factoring companies offer flexible terms that allow you to choose which invoices to factor, giving you control over your cash flow management.

Is there a minimum volume requirement for factoring?

Some factoring companies have minimum volume requirements, while others do not. It’s important to understand these requirements when choosing a factoring company to ensure it aligns with your business’s needs before signing up.

How long does it take to set up freight factoring?

Setting up freight factoring can vary depending on the factoring company and your business’s specific circumstances. Generally, the process involves completing an application, submitting necessary documents such as invoices and proof of delivery, and undergoing a credit check. Once approved, funding can typically begin within a few days.

Will freight factoring affect my credit score?

No, freight factoring does not impact your credit score because it is not a loan. Factoring companies base their decisions on your customers’ creditworthiness rather than your own credit history. This allows trucking companies with varying credit histories or new businesses to access immediate cash flow without relying on personal or business credit scores

Can I use freight factoring if I have bad credit?

Yes, freight factoring is accessible to trucking companies with varying credit histories, including those with less-than-perfect credit or limited credit history. Factoring companies primarily assess the creditworthiness of your customers rather than your own credit score. This makes factoring an attractive option for businesses looking to improve cash flow without relying on personal or business credit.

Can I factor if I am a broker? 

Yes, brokers and carriers alike can utilize a factoring company to speed up and increase cash flow.

Confused About Choosing The Right Factoring Service for Your Business?

Give us a call today! We will gladly have one of our experienced team members teach you the ins and outs of all things factoring. You do not have to factor with us, we are here to help you make the right decision for your business. 

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