What Is Freight Factoring?

Freight

It's the early hours of the morning. You've been up all night, poring over your freight business' books. Tax forms, payroll, expenses – there's a lot being spent, but not as much coming in as you'd like. Still, business is booming! Where is the problem?

You cast your eyes over a stack of unpaid invoices… Of course! All that money that's rightfully yours is still out there in limbo, waiting to be paid off by your customers. But customer payments can take months, and it would be nice if you could secure this money as soon as possible. Enter freight factoring.

Freight factoring is a way of getting an advance on your invoices for a nominal fee. By selling your invoices to a freight factoring company, you'll be able to secure your cash quickly, letting you make other time-sensitive payments. For quotes on how much you'll need to pay to secure your own invoice advances, use our free quote-finding tool.

What Is Freight Factoring?

Freight factoring is the process of selling your unpaid invoices to a factoring company for an advance on the money you're owed.

For example, let's say your business has finished a trucking job for a payment of $10,000. Your customer has 90 days to pay the invoice, but you're looking to buy a new truck or take advantage of low gas prices, so you'd prefer it if you had that money immediately.

You contact a freight factoring company and, after filling out the paperwork, sell your invoice for an advance of around 90% of the invoice's value (this percentage can vary based on factors like your credit and your initial request). While you're free to use this money as you wish, the factoring company then assumes the role of recipient of your customer's payment.

Once the factoring company receives payment, they'll give you the remaining amount of the invoice after subtracting their agreed-upon fee (between 0.5-5% of the invoice's total value). For example, if their fee was 2%, and there were no additional fees, they'd take a total of $200 from the $10,000, leaving you with $9,800.

This can benefit businesses looking to capitalize on opportunities that might otherwise pass them by. For example, gas prices are rising by the day, so buying as much as possible to run your business while prices are lower may be a prudent move. Or, if you wanted to buy another vehicle to start fulfilling more orders, factoring would allow you to do so sooner.

What Are the Advantages and Disadvantages of Freight Factoring?

The main reason any business would want to factor its invoices is to increase the speed of payment. Some factoring companies offer same-day payment, which can be a huge benefit for businesses with time-sensitive payments or purchases on the horizon, especially when compared to the 90 days it can take for customers to pay their invoices.

Invoice factoring is also far easier than a loan or other form of financial assistance. Loans take time to get approved, and may even be denied. Invoice factoring will usually never be denied, unless you don't meet some of the factoring company's concrete prerequisites (certain annual turnover thresholds, for example).

An obvious disadvantage of freight factoring is the cost. If you had an invoice worth $10,000, and decided to factor it at a rate of 2%, you'd end up with $9,800. If you were able to wait it out until your customer paid you directly, you'd end up with $10,000. This is obviously preferable to the $9,800 figure – you're essentially paying the $200 to secure the money sooner rather than later, a cost that may be worth it in many cases.

One element that is more of a risk than a straight-up disadvantage is the concept of recourse factoring. Recourse factoring means that if the invoice goes unpaid, you'll need to buy it back from the factoring company, which can obviously be a bit of a blow. The other option is non-recourse factoring, which means you won't have to buy it back, but the factoring company will charge more due to the risk.

What Is the Difference Between a Loan and Freight Factoring?

While a loan is a temporary financial infusion that needs to be paid back over time, freight factoring is an advance on money that is rightfully yours. You won't need to pay anything back over time, there won't be any debt hovering over you, and there won't be anything like interest rates or monthly payments. You simply pay the one-time deduction when the factoring company pays you, and you're on your way.

Another difference is the ease of application. Applying for a loan can take a while as the bank or loan company assesses your credit, history, projections, and any number of other factors. Applying for invoice factoring, on the other hand, is a much smoother process. When you first contact a factoring company, you'll have to pass a hurdle or two, but it won't be anywhere near as strict or longform as a loan application.

What Is the Difference Between QuickPay and Freight Factoring?

If you're not familiar, QuickPay is an option for more financially secure businesses that don't need to factor each and every invoice, but rather need a little boost from time to time.

Despite the name, using QuickPay is somewhat slower than factoring an invoice. QuickPay can take between 3-5 days, while invoice factoring will usually take no longer than a full business day. QuickPay is also run on a case-by-case basis, while factoring companies will usually offer longterm contracts that encompass multiple invoices.

Due to the longevity of these contracts, businesses will form more of a relationship with factoring companies. As a result, there are usually more customer-friendly resources in a factoring relationship, like client portals and fuel card discounts. However, these benefits do mean that factoring will cost more than using QuickPay.

How to Choose the Right Factoring Company for Trucking

There are a few factors at play when choosing a freight factoring company. First, and most obvious, is the rates you'll need to pay to factor your invoice. These rates range from 0.5-5%, and are based mainly on the invoice's value. Other elements that can affect the rate include a customer's payment speed and the recourse/non-recourse options mentioned above.

Other charges can also pop up in certain circumstances, like if your customer takes a long time to pay or you need to be paid in a specific way, such as through a wire or ACH transfer. But these won't come as surprises, since they'll be laid out when you sign up. They're also usually pretty low amounts, but still worth considering.

Finally, the payment speed may be a factor for some businesses that need funds as soon as possible. Some factoring companies, like Apex, offer same-day/next-day processing, while others might take two or three days to get the money to you. This wouldn't usually be a dealbreaker, but there can be times when every second counts, so it might be worth considering.

If you'd like to cut down on research and avoid getting lost in an avalanche of different rates and figures, you can use our free quote-finding tool to be given quotes from various freight factoring companies. These quotes can help you compare, contrast, and ultimately find the best factoring company for your business.

FAQs

Who can benefit from a freight factoring company?
Most trucking/freight businesses can benefit from a relationship with a factoring company. Factoring costs are very low, meaning that it isn't a huge investment in exchange for a massive increase in financial flexibility and freedom.
What is recourse and non-recourse factoring?
Recourse factoring is the most common form of factoring, wherein you will need to buy back your invoice from the factoring company if your customers fail to pay. Non-recourse factoring means that you won't need to buy the invoices back, but the overall factoring fee will be much higher because the factoring company is taking on more risk.
What is spot factoring?
While many invoice factoring companies will enter contracts with trucking/freight companies wherein all of their invoices are systematically factored, spot factoring is a system where businesses can factor individual invoices at their discretion, without entering any longterm contracts.
What is an advance rate?
Sometimes companies will deduct around 1% of the advance payment. For example, a company may take 1% of the 90% they gave you as an advance, leaving you with 89% (that would be $8,900 of your $10,000 invoice, with the factoring company taking $100).
Duncan Lambden
Duncan Lambden Senior Writer

Duncan (BA in English Textual Studies and Game Design) is an Australian-born writer for Expert Market. His articles focus on ecommerce platforms and business software that allows small businesses to improve their efficiency or reach, with an emphasis on invoice financing and customer relations. He has written for Website Builder Expert and Tech.co, and has been featured in Forbes. In his free time, Duncan loves to deconstruct video games, which means that his loved ones are keenly concerned about the amount of time he spends looking at screens.