If you’re in the trucking industry, you’ve probably heard of freight factoring services. These services have become a popular way for small business owners and trucking companies to get paid sooner.
As you know, it can take 30 to 45 days to receive payment for your services. Some shippers wait 60 to 90 days (or longer), making running and growing a trucking business difficult for many owners-operators and companies.
Freight factoring offers a way for you to receive payment sooner, so you can pay your truck drivers and cover working capital without taking on debt. It also allows you to outsource collecting the payments for your invoices so you don’t have to spend so much time on administrative tasks.
Read on to find out more about freight factoring, how it works, and what to consider when choosing a factoring company.
What Is Freight Factoring?
Freight factoring, also called trucking factoring, is a type of financing that allows operators and business owners to sell their unpaid invoices for cash upfront. Sometimes referred to as a business loan, freight invoice factoring sells your freight bills at a discount.
In a freight factoring agreement, a trucking factoring company gives you a percentage of your total invoice upfront. When the invoices come due, the factoring company gets their money back plus their fees when they collect from your customers.
The average time it takes for an invoice to be paid in the trucking industry is 30 to 45 days. It’s a win for shippers since they don’t have to pay for the shipment immediately. However, this system can make it difficult for trucking companies to pay their bills and other overhead costs on time. On top of that, it’s also a competitive advantage to offer longer payment terms since most clients prefer it.
Freight factoring companies help fill the cash flow gap. Factoring offers a solution where truckers get paid sooner so they can run their businesses and still offer longer payment terms to customers. If you’re an owner-operator or a growing company, you might appreciate not having to deal with collecting customer payments.
This is why freight factoring is a flexible funding option worth exploring. It’s available to all business owners, even those with a low credit score. Since you’re selling your accounts receivables, lenders are more interested in your customers’ creditworthiness. In addition, you can arrange freight financing agreements in a day and receive an immediate advance.
What Is a Typical Factoring Fee?
The factoring fee is the cost of factoring or the cash advance rate you pay for getting your money upfront. It’s usually expressed as a percentage of the total invoice value.
Some lenders offer a flat rate (the same percentage fee for every invoice) or a tiered factoring fee (a lower rate on invoices that pay quickly and a higher rate on invoices that pay slowly).
Let’s say you’re factoring $10,000 worth of invoices and your rate is 3% — your factoring fee is $300 ($10,000 x 3%).
Factoring companies give you 85% to 95% of the total invoice value, collect the payment from the customer when it comes due, and give you the remaining amount minus their fee ($300).
In this case, if you agreed to receive a 90% upfront payment, you’ll get $9,000 ($10,000 x 90%) deposited to your account. Then, you receive the remaining $700 when all invoices are paid.
Factoring rates range between 1% and 5%, and what borrowers pay varies based on:
The number of invoices you factor: Factoring companies typically give you a low rate if you have more receivables to factor each month. From a business perspective, factors want to keep you as a client so they’ll give you better rates and terms.
Your payment terms: You receive a cash advance when you go through freight factoring, and the factoring company has to wait for your invoices to come due to get their money back. Offering extended payment terms to your customers may mean lenders will charge a higher fee to compensate for the longer wait.
The creditworthiness of your customers: Factoring companies want to know about your customer base. They prefer it if you have multiple clients and freight brokers. They consider it risky if you work with only one client or a small number of customers. If you factor just one invoice and the customer doesn’t pay, the whole factor goes unpaid.
Freight brokers act as middlemen and consultants for shippers and truckers. Shippers contact freight brokers to connect them to carriers. They also make it easier for truckers to do business. Instead of spending time giving customers updates on their shipments, truckers carry the load and freight brokers take over the back-and-forth communication with customers.
The factoring fee is one consideration you should look at when choosing a trucking factoring company. It’s important to check for additional costs, like invoice processing fees and termination fees.
Some factoring companies offer incentives, like a mobile app, free credit checks on your customers, and fuel cards or fuel discounts. These are all enticing, but remember to review and understand the terms of your factoring agreement before you sign on the dotted line.
Recourse vs. Nonrecourse Factoring
There are two types of factoring:
Recourse factors: In a recourse factor, any unpaid invoice is your responsibility (including fees). Some factors also allow you to replace the unpaid invoice with a current receipt with a similar value.
Nonrecourse factors: In a nonrecourse factor, the risk is on the factoring company if the customer doesn’t pay. You don’t have to pay the invoice or replace it with a new one. However, lenders charge higher pricing for nonrecourse factors since the risk is higher.
How Long Does It Take for a Factoring Company to Pay?
Most factoring companies offer next-day or same-day funding. This means you can receive money in your bank account within 24 hours of your application.
At most, it could take a week. But that’s only if you have to complete additional documentation or if they need to do credit checks on your customers.
What to Consider When Choosing a Freight Factoring Company
Your relationship with the right trucking factoring company could lead to long-term contracts, as you might factor in multiple invoices with them. So, it’s important to shop around and compare before you decide. Aside from rates and fees, here are some things to consider when choosing a factoring company.
Reputability
There are many players in the lending industry, especially in alternative lending like trucking factoring. It’s easy to make a website look legitimate, so it’s important to thoroughly vet each company.
Check if they’re listed with the Better Business Bureau (BBB) and check their Trustpilot rating. Read reviews. What better way to gauge a company’s reliability and trustworthiness than from people who have experience with their service?
Simplicity
When looking for a factoring company, choose one that makes the application process easy and manageable. You don’t have to jump through hoops to get a factoring contract. In addition, the rates and terms of your agreement should be clear.
Avoid companies that offer complex contracts and vague terms with hidden fees. Some factoring companies require a monthly minimum volume of invoices. This isn’t necessarily a disadvantage — just make sure you understand what you’re agreeing to before signing up.
When you work with Clarify Capital, you get fast and easy business financing. It takes two minutes to fill out the application form. Furthermore, we match you with a dedicated advisor who will work with you every step of the way.
We know that running a business is complicated enough. That’s why we strive to keep things simple, convenient, and transparent.
Service
Choose a factoring company that treats you right. Reading customer reviews and asking other business owners can help you gauge whether a company offers great customer service. Ask about the way they communicate.
Are they helpful? Do they answer questions? When issues come up, do they address them?
At Clarify, we believe our success depends on delivering what you need and exceeding your expectations. We value our relationship with you.
Check what our previous customers are saying about us on Trustpilot.
Discover the Best Invoice Factoring Options From Clarify Capital
As the owner of a trucking company, you’re probably tired of waiting weeks or months to receive payment for services you’ve already delivered. Get relief from constantly juggling delayed payments on your outstanding invoices while you still have to pay your drivers and cover fuel costs.
Invoice factoring programs offer a way for you to run and grow your business with ease. Contact Clarify today to explore invoice factoring options for your trucking business.