Invoice factoring may be the solution your trucking business has been looking for. Factoring is a financial solution in which you sell your load invoices and get paid the same or next day by a factoring company. So rather than waiting 30 days to get paid, the factoring company gives you access to immediate cash flow. This allows trucking companies like yours to haul more loads and grow business faster. What is the factoring process for trucking? Read on to learn how factoring works.
The Factoring Process
A quick freight factoring definition is that it’s a finance solution that puts capital in your hands as a business owner. You sign up with a factoring company who agrees to pay you a pre-determined percentage of the invoice on a load you’ve delivered on the same or next day. So for example, some companies charge a 3% fee. That means you get 97% of your invoice paid to you directly.
Here's a full run-down of the factoring process:
1. You deliver a load for your client. Clients can take 30-plus days to pay you back, but you need money ASAP to pay for fuel, drivers, and more. You've signed up with a factoring company, so you don't have to worry about that anymore.
2. You scan and upload your invoice online to your factoring company. Some factoring companies have online portals for their customers to submit invoices, track customers and payments, and check broker credit for free! You open up the CamScanner app and take a picture of the invoice. Your factoring company happens to have an online portal, so you upload the invoice in just 2 minutes.
3. You get paid within 24 to 48 hours! The factoring company received your invoice on the same day you submitted it and processed it quickly. The amount deposited in your account will vary depending on the factoring fee your factor charges. If your invoice was for $1,000 and the factor has only a 3% fee, you will receive $970.
4. The factoring company handles invoicing, billing, and collections from your customer. If you choose non-recourse factoring, you won’t be responsible if your customer doesn’t pay the factor. The factor will absorb the loss.
Types of Factoring
There are two types of factoring: recourse and non-recourse.
In a recourse factoring agreement, a carrier can expect a low factoring fee, low advance rates, and responsibility if their client does not pay the factoring company on an invoice in a timely manner. The factoring fee is a little lower to make up for the fact that the carrier will be liable if their customer doesn't pay.
Non-recourse factoring agreements have higher factoring fees, high advance rates, and no responsibility to pay a factoring company if the client doesn't pay on an invoice. This is more a no-strings attached agreement, which is why the fee is a little bit higher.
Factoring Hidden Fees
· Application: Some factors require a fee just to apply, whether or not you get approved! These fees can cost a few hundred dollars.
· Sign-Up: Upon approval, some factors require you to pay an initial fee to start factoring with them. These fees can also cost a few hundred dollars and won’t apply toward a factoring fee on a load. The sign-up fee and the application fee are just administrative fees.
· ACH Transfer: There are companies that charge a fee to electronically transfer or deposit funds into your account. These fees can range from $10 to $25, which can really add up to a lot of money over time! Some factoring companies charge $1 ACH fee per invoice. Others will give you a discount if you submit loads in a batch, making you wait to accumulate multiple loads before you can get paid. That means you have to pick between getting paid ASAP for a higher fee or waiting a little bit to get a lower ACH transfer fee.
· Minimum Volume: Some factors require carriers to factor a minimum number of loads. If that minimum volume of invoices is not met, they either charge an extra fee to the carrier or increase the factoring rate percentage after a certain time period, such as one month or 90 days.
· Reserves: Factors may charge reserve rates as an insurance in case a broker fails to pay. This means a percentage of your invoice amount is kept “on hold” for 30 days or until a broker pays the factor. Imagine you have a $1,000 invoice. Your factor has a 3% factoring rate and 2% reserve fee, so you get paid only 95% of that invoice amount. You will have $950 in the bank but $20 will be kept by the factor as insurance. This may seem like a small amount, but if you factor $10,000 in loads per month, that's $200 kept on hold for over a month. That extra $200 could go toward a small repair or be the short-pay ona driver's paycheck!
· Termination: If you have a contract with a length of terms and decide to stop factoring before the contract expires, you may get charged a lot of money to break that contract. Some companies charge over $1,000 to terminate. Be careful when deciding the length of your contract!
· Credit Checks: Before picking up a load from a broker, you want to know if that broker is reliable and will pay your factoring company. In some cases, you might have to pay for every broker credit check you request from the factor. Other factors have free credit checks online.
· Same-day Funding: You may pay extra to get your funds deposited the same day in your account.
As you can see, a lot goes into a factoring agreement. Factoring is supposed to be a financial solution that helps you stabilize cash flow, not rob you of money through multiple hidden fees. Before accepting a Terms of Service or signing an official contract, be sure to read the fine print and ask about all these potential charges!