How Does Freight Factoring Work? Insights From the Industry’s Factoring Leader

The global economy relies heavily on the movement of freight from manufacturers to warehouses, warehouses to trailers or shipping containers, and then to the stores or packaging companies that sell and ship merchandise to consumers. Without trucking companies, the world’s economy would crash.

But, there’s a downfall. Traditional trucking measures had truck drivers delivering loads and returning the bill of lading to the office where an invoice was generated and faxed or mailed to the broker or shipper. That company might not pay for 30, 60, or even 90 days. By the time they do get around to paying, your company’s struggling with financial strain.

You have bills like fuel, rent, business and truck loans, and salaries that you cannot ignore. Freight factoring is a powerful business arrangement that ensures you have a steady cash flow and additional services that help your company grow and flourish.

The Problems Trucking Companies Face When It Comes to a Strong Cash Flow

How does your current business model work? With most trucking companies, you or your driver haul a load to the delivery address and get a signed bill of lading. That bill of lading goes back to the office where an invoice is generated and sent to the client. Traditional payment terms usually range from 30 to 90 days, but some payments, such as FEMA loads, might take longer.

In the meantime, you can only sit back and wait for payment. You have the mail times if you still mail invoices to clients. You also have mail times if your client pays via a check in the mail. You also have the time it takes to clear the bank. Until all of that happens, you have no income for bills, wages, insurance, fuel, maintenance, payroll taxes, etc. None of that is going to wait.

When you’re a smaller trucking business, the wait is stressful and makes it incredibly hard to grow. It’s a leading reason that upwards of nine out of 10 new trucking companies fail. 

For small and medium-sized trucking businesses, this delay can be crippling. It limits their ability to take on new jobs, invest in equipment upgrades, or even meet existing financial obligations. 

Ease Stress and Financial Strain With Freight Factoring Solutions

When you struggle to pay the bills, the stress builds up. That stress impacts your emotional and physical health. A strong cash flow eases that stress and uncertainty by solving your cash flow issues. 

Instead of billing a client and hoping they pay on time, you get immediate payment from the freight factoring company. You have a steady cash flow, and someone else has to chase payments and handle that part of the business finances. Here’s how a typical freight factoring process works.

  • Deliver the Load and Get the Bill of Lading: After delivery, upload the bill of lading to the freight factoring company for processing.
  • Get Paid: The freight factoring company generates an invoice to send to your client and awaits payment from them. In the meantime, you get a cash advance to a fuel card or straight to your bank through a bank transfer. The money sent to you is usually a percentage of the amount due minus any freight factoring fees.
  • Wait: Once you have the money, there is a chance you will be held responsible if your client doesn’t pay. This depends on whether you sign a recourse or non-recourse agreement. With a recourse agreement, you would have to repay the money you were advanced.
  • Receive the Balance: Once your client pays the invoice, any remaining percentage due to you is sent to your fuel card or bank.

Five Key Benefits of Freight Factoring

There are five clear benefits to a freight factoring arrangement.

  • Improved Cash Flow: You have a steady cash flow to ensure you cover your expenses, wages, and employment taxes.
  • Less Bookkeeping Work: Your office staff isn’t spending a lot of time on invoicing, chasing payments, and making sure deposits clear the bank. The freight factoring company takes over the invoicing and tracking down unpaid invoices.
  • Lower Risk: If you arrange a non-recourse freight factoring arrangement, you lower the risk of never being paid. If a broker or shipper suddenly shuts down or files bankruptcy without paying you, a non-recourse arrangement protects you. You’ve already been paid. The factor has to deal with the lack of payment.
  • Business Growth: With a steady flow of income, you’re able to grow your business. You’re not dealing with late payment fees and high loads of debt that impact your business credit score.
  • Fuel Discounts: Freight factoring arrangements often entitle you to fuel discounts. If you’re saving money on every gallon of gas or diesel, you have more money to invest in your business.

Break Down the Costs of Factoring

Freight factoring is a service, so there are fees. You cannot go into this arrangement believing it’s free. You’re paying for the service you get. Typically, these are the fees you’ll encounter.

  • Factoring Fees: This is the fee that is deducted from the amount you’re owed through your invoice. Factoring fees are based on the number of trucks in your fleet and how much business you do each month. Typically, a freight factoring fee is in the 1% to 5% range, but it does vary from one company to another.
  • Reserve Fees: When you get paid by a factor, you get a percentage of the money due. Some offer full 100% payments, but most offer 85% to 95%. The remaining 5% to 15% is reserved until the invoice is paid by the broker or shipper.
  • Minimum Fees: Not every factoring company requires you to meet a minimum number of transactions each year, but some do. If you don’t meet the minimum, you pay a fee for not submitting enough bills of ladings that month.
  • Credit Check Fees: Ideally, you want to partner with a freight factoring company that provides free business credit checks of the brokers or shippers you’re thinking of working with. Some only offer a few free credit checks per month, and then you’re responsible for the cost of additional ones.
  • Bank (EBT) Fees: Finally, your bank or the freight factoring company may charge a bank fee for the electronic transfer of funds. If you sign up for a factoring company’s gas or business debit card, you can often avoid bank fees.

You need to compare the fees with different freight factoring companies to find the best option for your needs. You might be okay with higher fees if it means unlimited free credit checks. Don’t be afraid to negotiate to ensure you get the best freight factoring agreement for your company’s needs.

Is Freight Factoring the Right Solution for You?

Not every company will find freight factoring to be a good fit for their needs. Before you sign up for freight factoring, ask yourself these questions. 

Who Are Your Clients?

If you have a handful of clients who always pay you within a couple of weeks, you wouldn’t need to factor your invoices. If you’re always looking for new clients and work with companies you have no experience with, freight factoring is a great solution to the worries about whether or not they’ll pay you on time.

How Are Your Invoices Usually Paid?

What are your current invoice terms? Do you have 30, 60, or 90-day payment terms? If you’re finding it hard to keep up with business expenses because your invoices aren’t paid as quickly as you need, freight factoring is a good choice.

Do You Know Your Brokers’ and Shippers’ Creditworthiness?

Do you do a lot of work with new clients? Do you wish you could check a broker or shipper’s creditworthiness before agreeing to work with them? Freight factoring makes that possible if unlimited free business credit checks are an included service.

Are You Trying to Grow Your Business?

Most importantly, are you trying to grow your trucking business and need a consistent cash flow? Freight factoring makes this easy.

If you’re still unsure, the best step to take is to talk to a freight factoring specialist. TBS has decades of experience in trucking and freight factoring and knows the ins and outs of factoring agreements and the trucking world. We’ll help you determine what the fees would be, how freight factoring can help, or if it’s better to stay with your current invoicing arrangement.

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