Guide to Freight Factoring

Guide to Freight Factoring

Trucks power the U.S. economy. Nearly 71% of all goods—some 10.5 billion tons of product—are shipped on trucks each year. The industry employs 7.4 million folks, including 3.5 million drivers. In 2016, revenues from primary trucking shipments eclipsed $738.9 billion. Altogether, truckers log 432 billion miles on the road each year, consuming 54 billion gallons of fuel.

Despite the importance of the industry, trucking companies are often caught in tricky financial situations. They have to spend a lot of money acquiring materials to deliver to customers and absorb a slew of operating expenses (e.g., fuel costs, vehicle maintenance, salary expenses, and insurance, among other things). At the same time, customers can take 60 days—or even longer—from the time of being invoiced to settle what they owe.

Freight brokers face a similar dilemma. These companies generally need to pay carriers within 30 days. Unfortunately, shippers (i.e., their customers) usually take longer than that to settle their bills—which often causes brokers to run into cash flow problems.

Since freight brokers and trucking companies need cash to fund their operations, many of them must look to alternative sources of financing every now and again in order to keep the U.S. economy humming along.

What is freight factoring?

Freight factoring is a source of financing for brokers and trucking companies that involves selling unpaid invoices to third parties at a discount.

Generally speaking, brokers and trucking businesses get anywhere between 60% and 95% of the full value of the invoices they sell up front. Once their customers pay the factoring company, they’ll get the remainder of the balance, minus the factoring company’s fees, which usually hover somewhere between 1.5% and 5% (more on that later).

Freight factoring gives trucking companies and freight brokers the cash they need to fund future deliveries. Instead of waiting weeks or even months for payments to come in before being able to haul the next load, companies that use freight factoring can continue growing their businesses every day.

How freight factoring works

So how exactly does freight factoring work?

Imagine a broker hires a trucker to haul a load for a wholesaler. The wholesaler agrees to pay the broker within 30 days, but the trucker wants payment before then.

The broker can sell the invoice to the freight factoring company, which would then give the broker up to 95% of the full value of the invoice—sometimes even on the same day. The broker would then use those funds to pay the trucker.

Assuming the wholesaler sticks to the payment terms, they would pay the full value of the invoice directly to the factoring company (not the broker) within 30 days. The factoring company would then fork over the remaining 10% they owed the broker, minus any fees they charge.

Trucking companies that don’t use brokers can work directly with factoring companies, too. After delivering a load, they’d send their customer’s unpaid invoice to the lender, who would then send money to the trucking company right away.

The customer would then pay the factoring company directly to settle their account. Finally, the factoring company would send over the remaining balance of the invoice, minus their fees.

The benefits of freight factoring

Freight factoring has become increasingly popular in recent years, and there are good reasons why. This type of financing provides trucking companies and brokers with a number of benefits, such as:

  • Fast money. When money problems are around the corner, you need cash—and you need it quickly. Most freight factoring companies are able to fund businesses like yours in as fast as 24 hours. Unlike other more traditional forms of business financing—like loans from banking institutions—the factoring approval process is relatively straightforward. Companies that have less than perfect credit scores can even qualify for financing, so long as their customers are deemed creditworthy.

  • Options. After you’ve decided to use freight factoring, most lenders will ask you whether you want non-recourse factoring or recourse factoring. Non-recourse factoring protects your company from financial liabilities in the event your customers don’t end up paying their bills. Since the factoring company assumes the risk, this is generally a more expensive option. Recourse factoring, on the other hand, is a more affordable version of freight factoring, but if your customers don’t pay their bills, your company is on the hook financially. Most leading freight factoring companies perform comprehensive credit checks on your customers before agreeing to finance their invoices, so there are some built-in mechanisms in recourse factoring that can lessen your risk.

  • Flexibility. Most factoring companies allow you to factor the invoices you want to factor—no more, no less. For example, you might have customers that pay promptly, right after delivering a shipment. Most factoring companies won’t require you to finance those invoices. You can use freight factoring as frequently or infrequently as you’d like if you partner with flexible lenders.

  • No debt. When you secure a business loan or a line of credit, you take on short-term or long-term debt. Freight factoring, on the other hand, is a completely different animal. Since you’re selling your receivables to another company, you’re essentially borrowing against your own assets. Sure, you’ll have to miss out on a slice of your revenues to cover factoring costs. But for many trucking companies and freight brokers, that’s better than adding long-term liabilities to the balance sheet. And it’s certainly better than struggling to keep your doors open because cash is tight, or even worse, missing out on a great opportunity because of a lack of liquidity.

  • Better cash flow. One common reason trucking companies and freight brokers turn to factoring is to overcome cash flow gaps. Once you’ve solved your immediate cash flow problems, it’s much easier to run and grow a business. With cash on hand, you can take on more loads, hire more drivers, expand your fleet, repair and maintain vehicles, invest in new opportunities, and expand into new geographies, among other things.

  • Improved credit. With money in the bank, it’s much easier to pay your bills on time. The more you pay your bills on time, the higher your credit score will be. Over time, you may improve your credit score to the point where it’s easier to qualify for other kinds of business financing that are usually reserved for companies with spectacular financials. (Learn more about business credit scores here.)

  • Reclaimed time. When you’re struggling to find cash to pay your bills, you might end up spending a lot of time following up with your customers to try and track down payments. Not only is this time that you’re unable to invest in growing your business, you may end up annoying your customers, too—particularly if their payments are not past due. When you partner with a factoring company, you get cash up front. Since you don’t have to spend time shaking your customers down for payments, you have more time to focus on other pressing business matters.

As you can see, there are a number of reasons companies use freight factoring. But this form of business financing is not without its downsides.

Some disadvantages of freight factoring

While freight factoring can certainly help trucking companies and brokers overcome cash flow problems, there are several reasons why this form of financing might not work for all businesses.

Here are a few downsides to keep in mind:

  • It’s expensive. In most instances, freight factoring—which, remember, is much easier to qualify for than other forms of financing—is more expensive than traditional small business loans or lines of credit. In addition to the factoring rate, you may have to pay several fees—like customer credit check fees, setup fees, ACH transfer fees, and termination fees, for example. Every factoring company is different, so the exact fees and amounts will vary depending on the factoring company and agreement. While some might charge an exorbitant amount of fees, other lenders might not. Do thorough research and make sure you read all the fine print before signing any contract with a factoring company. The last thing you want is to be responsible for fees you didn’t see coming and didn’t plan to pay.

  • Factoring can be restrictive. While many factoring companies are flexible and let you pick and choose which invoices you factor, some of them may require you to factor everyinvoice from a specific customer. Some factors will only take invoices in bulk, even if you would prefer to handle invoices from different customers differently. If you’re only looking to solve a temporary cash flow problem, you may not want to get locked into that kind of arrangement.

  • Customers need to be creditworthy by the standards of the factor. Freight factoring companies won’t agree to finance every single invoice that comes their way. Prior to agreeing to factor any invoices, lenders will conduct credit checks of customers to gauge how likely they are to pay their bills on time. Assuming your customers have respectable credit histories, you shouldn’t have a hard time finding a factoring company to agree to work with you. That said, you may struggle to find financing for accounts that have poor credit.

  • It may reveal your cash struggles. Invoice your customers the traditional way and they pay you directly. When you partner with a factoring company, your customers send checks to them instead. If your customers are familiar with factoring, they’ll know right away that you are struggling financially—which is probably not the best look for your company. Even if your customers are completely unaware of factoring, they’ll at least be a bit puzzled as to why they are paying another company to do business with you.

Now that you understand the pros and cons of freight factoring, let’s turn our attention toward how much you can expect this form of financing to set you back.

Common freight factoring rates and fees

The amount you pay for freight factoring will depend on many variables. Larger companies, for example, are usually able to lock into more favorable factoring rates due to the volume of business they generate.

Before agreeing to work with any freight factoring company, you need to inquire about each of the following:

  • Factoring rates. Like all businesses, factoring companies need to make money. Most of them usually charge somewhere between 1% and 5% on each invoice they factor. Non-recourse factoring, where the freight factor bears all the risk, is more expensive than recourse factoring, where your company is financially responsible if your customers don’t pay their bills. Larger companies generally tend to get better rates than smaller companies because they get charged a flat fee per invoice whereas smaller companies get charged weekly or monthly until their customer repays, depending on the terms of their agreement.

  • Factoring advances. How much of the invoice is the factoring company going to give you up front? On the low end of the scale, some companies may only offer to front you 60% of an invoice. On the high end, you could strike gold and get up to 95%. Depending on the lender you decide to partner with, there may be some wiggle room here during contract negotiations.

  • Factoring fees. Different factoring companies charge different fees. Some might charge an origination fee to establish the relationship (e.g., $500). Others might charge a fee to conduct credit checks on each of your customers. Depending on the way the freight factoring company pays you, there may be other fees as well (e.g., ACH transfer fee or wire fee). Some lenders may try to lock you into a long-term contract and then charge a termination fee if you want to get out of it. Prior to signing an agreement, make sure to ask factoring companies about any and all fees they may charge.

Some factoring companies will also use your customers’ credit scores to determine how much to charge you. It may be cheaper to factor invoices from customers with near-perfect credit scores, for example.

Many lenders offer flat factoring fees—meaning you pay the same rate regardless of when your customers settle their invoices. Some lenders also offer tiered factoring fees. Under these arrangements, factoring fees vary depending on how long it takes for customers to repay. Bills paid within 15 days, for example, are less expensive to factor than bills paid within 90 days.

What should you look for in freight factoring companies?

As you begin your search for a factoring company to work with, you’ll quickly find out you have a lot of options to choose from. Instead of partnering with the first company you come across, you need to research your options to see which freight factor makes the most sense for your business.

Here are some things to keep in mind as you narrow down your search:

  • How long has the lender been in business? You may not want to partner with a brand-new factoring company. What if they run into cash flow problems of their own? Look for lenders that have established track records of success. This doesn’t mean the company always needs to have been in business for decades. They just need to be well-funded.

  • What is the company’s reputation like? Does the lender you’re considering have a robust online presence? Do a quick Google search to see what customers are saying and see what else you can turn up. If everyone’s talking about how bad their experience with a certain lender was, you would probably be wise to avoid working with them.

  • How fast can they fund your business? If you’re a large trucking operation, it can take as long as a week before a factoring company decides to work with you. If you’re a small company, it can take a day or two. Once you’re approved for financing, best-in-class lenders should be able to send money your way in as fast as 24 hours.

  • What rates and fees does the freight factoring company charge? Don’t sign any contract until you are absolutely certain about how much it will cost you to factor your invoices. A company that offers a favorable factor rate might offset that discount with several hidden fees—you never know. Do your due diligence and ask as many questions as you can think of to make sure you know what you’re getting into.

  • How large of an advance does the company offer? If you have cash flow problems, you probably want to work with a factoring company that will give you the largest percentage of your invoice up front—something closer to 95%, not 60%.

  • Does the company offer flexible terms? The last thing you want is to partner with a freight factoring company only to find out that you’re locked into a long-term contract, you can’t work with certain customers, or you need to factor every single invoice you generate. Leading lenders understand how important flexibility is in today’s dynamic business landscape. To this end, many are willing to be quite accommodating. Leading lenders let you factor invoices at your own leisure, with no frequency or volume requirements.

  • Do they need original invoices or are copies okay? Many factoring firms require trucking companies and freight brokers to submit original invoices to them in order to get an advance. Think about how much of a hassle that is! Today’s leading factoring companies are usually able to finance businesses like yours with copies of invoices. They don’t need the originals.

  • Is the factoring company experienced in the trucking industry? Factoring companies lend to businesses in all industries. Don’t automatically assume that the first invoice factoring company you stumble across is experienced in the trucking industry. Ask the lenders you’re considering about their qualifications. Factoring companies that are experienced in your industry will understand your pain points better than those that are not.

Choosing a factoring company is a major decision—one you shouldn’t make lightly. Take your time if you can afford to.

Otherwise, you may end up with a factoring company that makes your cash flow situation even worse—or at least takes more of your money away from you than some of their competitors would.

How to qualify for freight bill factoring

Since factoring companies are more interested in your customers’ credit history than your own, it’s relatively easy to qualify for freight bill factoring—even if you have a poor credit score. The longer your company has been in business, the easier it should be to get approved.

Generally speaking, small companies looking to factor $30,000 or less per month can qualify for freight factoring if they have credit scores of 530 or higher, have been in business for at least three to six months, and have outstanding invoices due within the next 90 days.

Large companies, on the other hand, looking to factor $30,000 or more per month can typically qualify if their customers are creditworthy, they’ve been in business for at least two years, and they have outstanding invoices due within the next 90 days.

What is fuel advance factoring?

In the trucking industry, you make money by hauling loads from one place to another.

To do that, you need to keep your fuel tank full—which is often easier said than done, particularly when your customers are slow to settle their accounts. The average truck, after all, consumes 20,500 gallons of fuel in a single year, costing upwards of $70,000.

When money’s tight, it can be difficult to cover fuel bills.

Since you can’t make money trucking if you can’t afford to fill up your gas tank, many trucking companies and freight brokers turn to fuel advance factoring solutions to finance their time on the road. As a result, they’re able to haul more loads while improving their cash flow.

How do fuel advances work?

In freight factoring, trucking companies and brokers get access to funds after delivering a load. In fuel advance factoring, funds are delivered beforea delivery takes place—right when truckers pick up loads. The trucking firm or broker can then use the funds to buy the fuel needed to take loads to the buyer.

Most freight factoring companies also offer fuel advance factoring services—some for free, some for a small fee. In most cases, these companies are willing to advance up to 50% of the cost of a delivery to help truckers cover fuel expenses on every factored load they haul.

To qualify for fuel advances, trucking companies and freight brokers need to submit a confirmation sheet and a bill of lading to the fuel advance factoring service to verify a specific load has been picked up. Once that’s been confirmed, the factoring company sends funds over right away.

Alternatives to freight factoring and fuel advance factoring

While freight factoring and fuel advance factoring can help businesses overcome temporary cash gaps, there are other financing options available to trucking companies and freight brokers.

For example, thanks to technological advances, a number of new alternative lenders have emerged in recent years.

Fundbox is one such alternative financing company. The fast-growing fintech company offers several financing solutions that may appeal to trucking companies and freight brokers, including:

  • Invoice financing. Instead of selling your unpaid invoices to a factoring company, you can borrow against them through a process known as invoice financing. Connect your accounting software to Fundbox and, if approved, choose which invoices you want to advance payments on up to your credit limit. The funds are then sent to your bank account as soon as the next business day. Depending on which option you choose, you then have 12 to 24 weeks to repay the advance, plus a flat fee. Repay early and save on any remaining fees. Unlike factoring, your customers still repay you directly.

  • Fundbox Pay. Sick of customers taking forever to settle their accounts? Fundbox Pay may be just what you’re looking for. The service enables trucking companies that get paid on net terms to receive payments immediately after they make deliveries. Buyers then have net terms during which to pay their bills before interest starts accruing.

  • Direct Draw. Looking for a little more financial wiggle room? You may want to apply for Direct Draw. The service provides credit lines of up to $100,000 to businesses like yours. Use the money to cover fuel costs, procure goods, and absorb operating expenses on an as-needed basis. You only pay interest on the funds you draw.

Fundbox makes small business financing easy. The application process is as painless as possible, and you’ll find out whether you’re approved for financing in just a few minutes.*

There’s no sense in regularly worrying about where you’ll find the money you need to grow your trucking company or freight brokerage. By partnering with Fundbox, you won’t have to.

Seeking alternatives to freight factoring, fuel advances, or other financing methods? See how much Fundbox Credit you could get in just 3 minutes.*

* Based on the median decision time for Fundbox customers.