How Does Freight Factoring Work?

Factoring puts money in your hands sooner rather than later so you can focus on your business. We discuss hidden fees, flat rates, and invoicing.

What is freight factoring?

Freight factoring is a financial solution that puts capital in your hands as a trucking business owner. A factoring company pays you a percentage of the invoice on a load you’ve delivered and keeps the remaining percentage for themselves. For example, a factor may pay you 97% of an invoice and keep 3% as a factoring fee.

Why does the factor keep 3%? Because you are getting paid immediately by the factor! You don't have to wait 30 days to get paid from a broker. The factor takes care of invoicing, paying you, and collecting from the broker. Less waiting, more hauling and earning.

The Process

First, let’s break down the steps of a factoring service.

Invoice factoring: Brokers usually pay carriers in 30-60 days. Many carriers can't wait that long to get paid because they have to pay for fuel, payroll, accidental maintenance. Factors will pay carriers right after carriers have delivered the load and submitted an invoice. This lets the factor collect from the broker on the carrier’s behalf. The factor buys the invoice from the carrier.

Billing/Invoicing: Since the factor buys the invoice from the carrier, it's the factor’s obligation to invoice the broker. That means the factor will generate, send, and confirm invoices for carriers, saving the carrier time. Since most carriers often have to work with new brokers, they may not be aware of specific invoicing details and may fail to bill the broker properly, resulting in overdue payments.

Collections: It's on the factor to collect the money from the broker, so carriers can forget about all the hassle. Usually, a carrier has to follow up for weeks with brokers who don't pay on time, which is stressful and time-consuming. A non-recourse takes over that process, and if the broker doesn't pay, it is their loss. A recourse factor, however, will go after the carrier for any outstanding payment from a broker.

Risk protection: Non-recourse factors will factor your load and assume the risk of non-payment in case of broker bankruptcy. Since brokers often go out of business, some factors also charge reserve rates, which is like insurance.

Types of Factoring

There are two types of factoring : recourse and non-recourse.

In recourse factoring, the company has recourse and therefore can come after you if the broker fails to pay them.

If you choose recourse factoring and there is a problem with an invoice, you are ultimately responsible for the invoice. If an invoice isn’t fully paid by your client, the factoring company can make you pay the difference between what was collected and what was the expected payment. If your client goes bankrupt, you are responsible for paying the factor.

This is a risk-sharing agreement that makes you more responsible for the payment practices of your customers. However, if you have great customers who pay on time, recourse factoring can be a wonderful solution since you will typically pay a lower fee compared to non-recourse factoring rates.

In non-recourse factoring, you are not liable to collect missed payments from your clients. Non-recourse is more complicated than recourse factoring, but it may protect your business interests.

If your customer goes broke, the factoring company loses the money, not you. There is no legal definition of non-recourse, though. A standard dictionary definition of non-recourse factoring is “secured by property or other collateral, with the borrower not being personally liable for further compensation if the debt is not repaid.”

If there is a dispute between you and your customer, and your customer doesn’t pay the entire invoice, you may be asked to help with resolution. This is a natural expectation because you have a direct relationship with your customer, not the factoring company.

On the other hand, if you were doing recourse factoring, the factoring company wouldn’t even try to help – they would just deduct the missing amount on the payment directly from your account.

Read more about the differences here.

Hidden Fees

Factoring companies can also have many hidden fees. A few examples are sign-up fees, termination fees, and administrative fees. Some factors may also hold reserves while factoring. The reserve rate is the percentage of an invoice that the factoring company keeps until your customer pays. Factors have reserve rates for one simple reason: to reduce risk if an invoice isn’t paid in full. This means some of your money will be stuck “on hold” each month if a broker doesn’t pay the factor.

Always be mindful of the various fees, contracts, and rates involved in a factoring agreement.

How to get started

To factor with InstaPay, simply complete our quick online application. We will approve you within 1 business day unless there are additional questions! We do same-day payments and a 3% flat rate with no hidden fees. Stop using us any time you want - for free.

How to use

Once approved, you can create an account with us online. Then, sign in to the online portal to submit invoices. We require Rate Confirmation and signed Proof of Delivery (BOL). You scan them with a mobile app (CamScanner) and upload them online to the portal. More here

Additionally, we have free online credit checks, customer lists, and complete invoice history available to you 24/7.

If you have questions, we're available to chat online. You can call us between 10am and 5pm CT!