Freight Factoring and How It Works

Interested in freight factoring and how it works?

Trucking factoring enables transportation companies to convert unpaid invoices to upfront cash. It is common for a shipping company to use freight factoring to offset cash flow differences while waiting for their shippers and freight brokers to pay. It is an economic system that helps centralize cash flow, giving you the freedom to manage other facets of your company.

Periodic billing timetables for cargo shipments may take one to three months. It can be hard for smaller firms to make ends meet when they depend on revenue to cover such things as fuel, salary, and vehicle maintenance. A trucking factoring company functions as a mediator, pays shipping invoices immediately, typically within the day, and carries over a fee. It will be in charge of collecting the outstanding balance from the clients. Besides, freight factoring charges can vary from 1.5% to 5% based on capacity or market.

Here’s how freight factoring works

Here is a brief rundown of how this kind of factoring works:

1. First, send a request for factoring. When accepted, the factoring firm will enter an agreement that sets out the details, along with the fees.
2. The company determines the credit ratings of your clients and approves the factors that will take into account.
3. Next, you will submit invoices that need to be factored in. The company will provide you with a percentage of the total of the purchase order and will work with your customers to collect the outstanding amount.
4. The firm’s dedicated account manager will make phone calls when necessary to collect the remaining amount.
5. The company deducts the factoring service fee once the payment is charged and returns any deposits to you.

The system is straightforward. It standardizes profitability for shipping companies, enabling them to cover their costs and expand their enterprises.

Related: Top 4 Transportation Business Loans for Your Growing Trucking Business

Is this method right for you?

Trucking factoring or freight factoring is a viable option for owner-operator freight companies who want to get paid upfront for work that they have accomplished to start new projects. More prominent companies may opt for this service if they wish to subcontract their transactions receivable or require immediate cash for outstanding invoices for cash flow.

Creditors with poor credit ratings may consider this to be the most economical choice for funding operating capital as they can benefit based on the credit ratings of the clients instead of your own.

Rates

The rates and terms depend on the size of your business and invoice value. More leading transport companies can factor all the invoices by contract factoring, whereas minor shipping companies are more likely to use spot factoring and only utilize selected invoices.

Smaller businesses can expect discount rates from 2% to 5%, whereas larger companies can expect 0.5% to 5%. The factoring company may also bill you an origination fee for your first transaction.

Smaller Trucking Companies

Because the company will charge you either per week or month, the general cost of freight factoring for owner-operators and smaller transport companies depends on how long it takes your customers to repay the invoice. The typical discount rate you will pay to the company fluctuates from 2% to 5% per month.

Standard rates and fees for small businesses

Factored amount: $1,000 to $5 million for every funding event

Average discount: Minimum 0.25% per week

Additional charges: Might require a one-time origination fee

Larger Trucking Companies

Trucking factoring for larger shipping companies is likely to be more affordable as they bill you a fixed fee for every invoice — between 0.5% to 5% each — instead of a weekly or monthly fee. When a factoring company provides collection and other facilities, the charge may be higher if you include extra charges.

Standard rates and fees for larger businesses

Factored amount: $30,000 to $20 million monthly

Average discount: Minimum 0.5% to 5% monthly

Additional charges: Might require a one-time origination fee or charges for not satisfying the minimum requirements for factoring.

Terms

Some factoring terms you can find in a freight factoring contract include:

Spot factoring: A spot factoring agreement permits you to select which invoices you would like to get factored. It does not require you to use all business invoices.

Contract factoring: Contract factoring arrangement requires you to factor all your invoices.

Recourse: When your contract is a recourse agreement, you agree to “repurchase” any unpaid client invoices. It can also involve extra costs billed by the factoring company.

Non-recourse: Under a non-recourse agreement, you are not liable for invoices that the clients do not pay because of increased liability to the factoring business in a non-recourse arrangement. The fees charged by the contractor are higher.

Likewise, freight factoring firms provide extra services, such as gas incentives, back-office help, and other rewards programs. Some even require a specific business volume monthly, so you must research all your choices before deciding a factoring company. For a small company, the charges may easily stack up to negatively affect profitability. Some alternatives to explore include partnering with brokers promising fast compensation or gas upgrades for a modest fee.