What is factoring in the trucking industry?
The answer may be the solution your business has been looking for. Factoring is a financial solution based on selling invoices that gives you access to immediate cash flow, so you can haul more loads and grow your business. What is factoring in trucking? Read on to learn more.
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. A factoring company pays you a percentage of the invoice on a load you’ve delivered same or next day. What do factoring companies do? Here’s a rundown:
1. You deliver a load for your client. Clients take 30-plus days to pay you back, but you need money ASAP to pay for fuel, drivers and more.
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!
3. You get paid within 24 to 48 hours! 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 percent 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.
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.
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 towards a factoring fee on a load.
· 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!
· 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.
· 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.
· 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. 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.
· Same-day Funding: You may pay extra to get your funds deposited the same day in your account.