Freight factoring is a beneficial service provided to owners and owners/operators in the trucking industry. The goal is to ensure companies get paid as quickly as possible for the loads they haul. Instead of waiting one, two, or three months, you get paid the same day or within a couple of business days at the very latest.
How does it work? You haul a load for your client. You have the bill of lading, which you’d usually use to generate an invoice. However, you sell that unpaid invoice to a freight factoring company instead. The amount you get paid is slightly lower than the invoice is worth, but it still works to your benefit because you receive the money ASAP and keep up with your bills, employee wages, etc. without having to use a credit card or business line of credit.
Suppose your broker owes you $10,000 for the load you just hauled. A freight factoring company offers to purchase it with a 3% factoring fee. You sell that invoice and get paid $9,700. You might face an EBT fee from your bank, but it depends on your bank. You’ve paid $300, but you’ve avoided using a business credit card where the interest rate is nearing 20%, so you save money.
That’s the basic structure of a freight factoring agreement. However, the industry is plagued by freight factoring myths. We explore the falsities below and point out the truth from the fiction.
Myth #1 – All Factoring Companies Are the Same
You’ve experienced one factoring company, so you’ve experienced them all. That’s not true. Freight factoring companies specialize solely in the trucking industry. They are often owned or managed by experts who have worked in trucking and have insider knowledge that helps you get the very best arrangement.
Factoring companies all set their own rates, so you won’t pay the same fees from one to the next. They also have different requirements when it comes to fleet sizes to get the best rates and if there’s an application fee involved when you sign on a new broker or shipper. Plus, they have services that are additional to the freight factoring process, such as fuel discounts, access to discounted insurance, load boards, business debit card products, and business credit checks.
Myth #2 – Factoring Is Expensive
Can factoring be expensive? It depends on the company and arrangement you agree to. Generally, freight factoring fees aren’t higher than 5%, and that’s far less expensive than credit card interest or even a business line of credit’s interest rate and application fees.
If you enter into a freight factoring agreement where your factoring fee is 3%, it’s not more expensive than the 22.16% average for business credit card rate (as of June 2024). Wells Fargo’s business line of credit (unsecured) currently starts at 10%. You’ll save money with freight factoring fees.
Myth #3 – Factoring Hurts Your Credit Rating
Freight factoring is a cash advance, it’s not a loan. You don’t pay it back in some circumstances, and there are ways to limit your risk even more with non-recourse factoring arrangements. As it’s not a loan product or line of credit, it never appears on your credit report. It’s not going to hurt your credit rating at all.
Myth #4 – Factoring Is Only for New Companies
There’s a very popular belief that freight factoring only helps new companies. That’s not the case. It can help any company and larger trucking companies often use freight factoring for one big reason. When you factor invoices, you don’t have to do all of the paperwork.
Submit a bill of lading via an app, and the factor does the rest. The factoring company generates an invoice that you can upload to your bookkeeping software. The factoring company sends the invoice to your client and chases down late payments too. Your office work for invoices and collections dwindles because of this service.
Myth #5 – Freight Factoring Companies Use Unfair Collections Tactics
Freight factoring companies don’t use unfair tactics to collect overdue invoices. They’re required to follow the same Fair Debt Collections Practices Act that any other company is required to follow.
Myth #6 – It’s Better to Use a Business Line of Credit
You could use a business line of credit to pay worker’s wages, insurances, permits/licenses, truck expenses, fuel, etc. until your client pays you, but what is the interest rate? As mentioned earlier, the national average varies, but it’s 10% or more with Wells Fargo. Freight factoring fees are usually well under that.
Myth #7 – It’s a Hassle With Extra Paperwork to Fill Out
Here’s the reality when it comes to submitting a bill of lading for immediate payment. Open the freight factoring company’s app, snap a picture of the bill of lading, submit it for payment, and wait for approval. You can track the status directly from your phone or tablet, and you’ll get a message when the payment is received.
Freight factoring often has you doing less paperwork as you don’t have to rush to get envelopes in the mail or scan and fax or email invoices anymore. You’ll save time and hassle.
Myth #8 – Shippers and Brokers Won’t Work With Trucking Companies Who Factor Invoices
Shippers and brokers don’t care if you sign up with a freight factoring company. They have to pay the invoice regardless. It doesn’t matter to them if they pay you or an agent on your behalf.
Myth #9 – You Have to Factor Every Clients’ Invoices
TBS never makes you factor every client you have. Pick and choose the clients you want us to handle and you keep invoicing the clients you prefer to handle on your own. Most companies follow this same policy. If you have a client who pays on time each month without fail, you should keep going the way it’s always worked.
Myth #10 – You’re Stuck in a Long-Term Contract
Some freight factoring companies do require longer contracts than others. The majority, however, including TBS, do not tie you down. You’re free to go when you want. There’s no long-term contract to sign, which gives you the power to try it for a few months, see if it’s benefiting your company, and walk away if it’s not right.
Ignore the Myths
We have one more thing you should know about freight factoring. If you have a non-recourse arrangement and a client fails to pay an invoice due to a sudden closure or bankruptcy, you’re protected. With so many companies abruptly closing, it provides peace of mind that the payment you received isn’t going to be revoked. You’re protected.
Not everything you hear about freight factoring is true. Make sure you understand the facts and ask questions if anything is unclear. TBS is ready to answer any questions you have, go over the rates, and get you started on a path to a steady cash flow.