Freight factoring, also known as freight bill factoring, is a form of business financing in the transportation industry. It helps carriers and brokers improve their cash flow by financing their invoices from slow-paying clients. Factoring provides companies with the funds to operate and grow to their full potential. We cover the following:
- How does freight factoring work?
- Typical rates / advances
- Recourse vs non-recourse
- Is factoring right for you?
- Are fuel advances included?
- Additional services
- Advantages of factoring
- Do you qualify?
1. How does freight factoring work?
The factoring process is simple and easy to understand. Your company finances its invoices by selling them to the factoring company. The factor pays you immediately for the invoices, which gives you immediate funds to run the company.
a) Single-installment transactions
Single-installment transactions are the simplest form of transportation factoring. They are popular among new and small carriers. In single-installment transactions, factors give you a single payment. This is also known as a “full advance.” These plans are offered with a flat-rate fee.
The advance is usually 95% to 98.5% of the invoice. The advance is deposited to your bank account or fuel card when the invoice is factored.
The remaining 1.5% to 5% that was not advanced becomes the fee for the service. Single-installment plans are usually more expensive than two-installment plans. However, they provide more cash up front.
b) Two-installment transactions
Two-installment transactions are more common among midsize and larger carriers. These transactions split your fund advances into two payments.
The first installment, called the advance, covers 90% to 95% of the invoice’s value. It is deposited in your bank account or fuel card within one business day of submitting the invoice to the factor.
The remaining funds, less the factor’s fee, are deposited in your account once the shipper pays the invoice in full. These transactions usually have lower “per dollar” costs than comparable single-installment transactions.
2. Typical rates and advances
The freight factoring industry is very competitive. Most transportation companies can get a factoring rate of 1% to 4%. Rates vary based on your invoice volume and the creditworthiness of your invoices.
Initial advances range from 90% to 98.5%. They vary based on whether you use single- or two-installment transactions. Advances can be negotiated based on your needs. Aim for an advance that covers your needs comfortably. Keep in mind that a lower advance also has lower costs than a higher advance rate.
3. Recourse vs. non-recourse?
Factoring programs are offered with recourse and without recourse. In a recourse transaction, the factor can return the invoice to you for reimbursement if it is not paid within 90 days.
In a non-recourse transaction, the factoring company takes the loss if your invoices do not pay due to an insolvency by your customer. It’s important to note that non-recourse usually covers insolvencies only. If your shipper does not pay because of a dispute, you still need to reimburse the factor for the advance. Non-recourse plans have a higher cost to compensate the factor for the extra risk.
Contrary to what you would expect, non-recourse factoring is not necessarily better than recourse. It is also not a solution to deal with potentially risky shippers. Factors will not finance invoices from questionable shippers regardless of recourse.
Non-recourse plans do offer protection for some circumstances. They can protect you against unexpected client bankruptcies. Learn more about recourse vs non-recourse.
4. Is factoring right for you?
Freight bill factoring is a great solution, but it solves one problem only. It helps carriers with cash flow problems due to slow-paying shippers and brokers. Factoring may be right for your company if you:
- Have creditworthy shippers
- Wait up to 60 days for payments
- Need funds sooner to pay for business expenses
5. Are fuel advances included?
Fuel advances are a benefit that many factoring companies offer to clients. As opposed to regular factoring, you can get these advances before you deliver the load to the destination.
Most factors can provide a fuel advance of up to 40% of the final invoice value. Despite its name, you are not restricted to using the advance for fuel costs. You can use it for repairs or any other business expense.
Each factor has its own rules regarding fuel advances. However, most require that you show them a:
- Rate confirmation sheet (shows load has been booked)
- Bill of lading (shows load has been picked up)
Fuel advances are more expensive than conventional factoring rates. It’s best to use them carefully. However, they can be a great tool for new carriers, who are often low on funds.
6. Additional services
Some factoring companies provide additional services that go beyond financing accounts receivables. Common services include:
a) Load boards
Some factors have custom-made load boards designed to help their clients get loads. In our case, we offer something that’s better than a load board. Some of our clients qualify for a dispatch service that finds loads for them. This service saves clients a lot of time and effort.
Note: While load boards are a good benefit for new carriers, we don’t believe they are a good source of long-term growth. You are better off finding your own trucking contracts and shippers that offer high-paying loads.
b) Equipment finance
Most factoring companies have partnerships with equipment finance companies. They can help you finance equipment purchases at competitive rates.
c) Insurance assistance
Some factors may also provide some assistance with your insurance needs. This is usually done through partnerships with pre-screened insurance companies.
7. Advantages of factoring
This financing solution offers transportation companies a number of advantages. Here are some of the most important ones:
a) Improves cash flow
The most important benefit a company gets from factoring is improved cash flow. This is the main reason that carriers and brokers sign on to factor their freight bills.
b) Fuel advances
Fuel advances are a great side benefit for newer carriers that are low on funds. They can also help carriers that are growing faster than their cash reserves allow.
c) Easier to get than other options
Getting a factoring line is relatively easy, especially when compared to other products. Most companies that apply for factoring have a good chance of getting it.
d) Quick approvals
Most factoring line requests get approved within a day of getting an application. Applications for larger or more complex logistics companies may take a couple of days.
e) Available to new carriers
Factoring is available to new carriers and can start helping you as soon as you pull your first load. It is one of the tools that can help a trucking company become successful.
f) Helps you grow your company
You won’t have to turn down clients because you don’t have the funds to run your business. Factoring improves your cash flow, providing the funds you need to run your business and service shippers.
8. Qualification requirements
The qualification requirements for this program are simple. Your transportation company must:
- Be a carrier or freight broker
- Have a fmcsa authority
- Have all the proper documentation, authorities, and licenses
- Work with creditworthy shippers/commercial clients
- Have freight bills that are free of liens
Want a quote?
We are a leading freight factoring company and can get you funded quickly. Our plans have high advances at low rates. For an instant quote, fill out this form or call (877) 300 3258 to speak with an expert.