How to Fund Freight Bills Using Factoring

Many new and growing transportation companies share one trait: they often encounter working capital problems because shippers tend to pay freight bills in four to eight weeks. As a result, the freight company must cover all delivery costs and then cover all corporate operating expenses while waiting to get paid.

Few owners are prepared for these costs. Unfortunately, these costs can add up quickly and create problems for companies without adequate cash reserves. The problem is the gap in time between when you have to pay your business expenses and when you receive your business income. There are three possible solutions:

  1. You can close the gap
  2. You can use business financing
  3. You can stop growing your business
We’ll assume that, if you are reading this article, option 3 is really not an alternative.

Option 1: Close the gap

The only way to close the gap is if your shippers pay sooner. If your shippers offer quick-pays, you could take them. Instead of waiting weeks to get paid, you usually get paid in 10 days using transportation quick-pays. This option would virtually close the gap and significantly improve your cash flow. However, this strategy has two problems. First, most shippers prefer to pay slowly because it helps their cash flow. So unless they already offer quick-pays, convincing them to pay sooner is difficult. Second, and more importantly, quick-pays are not always reliable. A shipper could choose to pay slowly at any time – and without warning. Given that many carriers and brokers operate with very tight cash flow, a few delayed payments could create a serious shortfall.

Option 2: Finance the gap

If you cannot close the gap, your best alternative is to finance it. One of the most effective ways to finance a transportation company with working capital problems is to factor freight bills. Factoring is a form of financing in which an intermediary company funds your slow-paying freight bills. This option provides you with immediate working capital and provides many of the benefits of quick-pays, but without requiring your customers to pay sooner. Most freight factoring transactions are funded in two installments. The first transaction covers 90% of the freight bill and is advanced as soon as you deliver the load. The remaining 10% is rebated as soon as your shipper pays for the load in full. The factoring company deducts a small fee from the remaining 10% payment for their service.

Factoring transaction structure

Most factoring transactions work as follows:

  1. You submit the freight bills (invoices) and documents to the finance company
  2. You get 90% of the value of the invoices deposited to your account
  3. The funding company verifies the invoices and mails the freight bills to your client
  4. The invoice is paid in full by your shipper – after 30 to 60 days
  5. The transaction settles. You get the remaining 10%, less the funding fee

It’s important to note that, prior to funding the invoices, the finance company verifies all freight bills and documents for accuracy and to ensure that the transaction proceeds without problems. Also, payments for your funded freight bills usually flow through the factoring company, which helps ensure a prompt settlement. Most shippers are familiar with these industry-standard procedures.

Your invoices are important collateral

The most important difference between a regular line of credit and freight bill factoring is how the collateral is evaluated. In an invoice factoring transaction, the actual invoice is the collateral. The funding company, relying on your customers’ ability to pay on time, closely examines the credit of your customers. Obviously, you can only finance bills from creditworthy shippers. The main advantage of this solution is that the factoring line has no upper limit: you can finance as many freight bills as you invoice, as long as they meet the funding criteria — making factoring an ideal option for small and mid-sized carriers and brokers that need funding for growth.

Need more information?

We are a leading freight factoring company and can provide you with high advances and low rates. For information, get an online quote or call us at (877) 300 3258.