What is Factoring?
Many businesses across various industries use factoring, sometimes called invoice factoring or accounts receivable factoring. But factoring is most common in the trucking and freight industry. You might see it called trucking factoring, freight factoring, or truckload factoring.
Trucking factoring is a process where you turn unpaid invoices into immediate working capital to keep your trucking business running smoothly. Truckers work with a third-party company that purchases unpaid invoices, issues a cash advance for a percentage of the invoice amount, and then collects from your customers.
Once your customers pay their invoice, the factoring company, or factor, sends you the remaining amount minus their fees. Freight factoring can provide flexible payment solutions and consistent cash flow for fleets, freight brokers, and owner-operators. Many options offer same-day or next-day funding for factor loads.
Let’s look at a factoring example.
Factoring Example
Trevor’s Trucking is a small freight company run by an owner-operator with four additional trucks and drivers. Most clients pay their freight invoices in 60 days.
However, the company’s fuel, insurance, and payroll costs are due long before the 60 days. So, to turn unpaid invoices into working capital, Trevor uses a factoring company with the following terms:
- 2% discount rate.
- 85% advance rate.
- 1% factoring fee
The company currently has $25,000 in invoices it wants to factor. It uploads the invoices to the factor, which runs a credit check and approves them for factoring.
The factoring company takes its 2% discount and purchases the invoices for $24,500. The factoring company issues a cash advance for 85% of the purchase price, meaning it sends $20,825 to Trevor’s Trucking via wire transfer within 24 hours.
The remaining $3,675 goes into a reserve account. The factoring company waits for the customers to pay. If it receives payment on time, it charges a one-time 1% fee, which comes out to $250.
The factoring company takes the $250 from the reserve amount and sends the remaining $3,425 to Trevor’s Trucking.
How do Trucking Factoring Companies Work?
When a trucking business partners with a factoring company, the first step is signing a contract. The factoring agreement stipulates the rates, fees, percentage of invoices to be factored, and length of the service. Some factoring companies offer flat-rate pricing while others have flexible rates.
In most cases, your trucking business agrees to work with factoring for a set period. Contracts could range from six months to several years. The approval process for freight factoring is typically faster than other financing options. Factoring companies often have volume requirements.
Long-term contracts require a significant commitment. Carefully reviewing the factoring agreement and contract terms is critical to ensuring the process works for your business. Look out for any hidden terms or fees that could cost you down the road. Some experts suggest getting a lawyer to review the agreement before signing the dotted line.
Each company differs in how it processes fees and services. Most trucking factoring companies provide a flat factor rate, or discount rate, that determines the percentage of the invoice that goes to the factoring company.
Some also include a factoring fee, which is a charge that accumulates while waiting for the client to pay their invoice. Charging a fee serves as an additional security measure for the factoring company in case the client pays late.
The Factoring Process
- Step 1: Sign a factoring agreement with a freight factoring company.
- Step 2: Deliver your truckloads and invoice the client.
- Step 3: Send the invoice to the trucking factoring company.
- Step 4: Receive a cash advance for a percentage of the invoice value within 24 hours.
- Step 5: The factoring company waits for your customers to pay.
- Step 6: The factoring company sends the rest of the invoice amount minus their fees.
Recourse vs. Non-Recourse Freight Factoring
Knowing the differences between recourse and non-recourse factoring is essential. Recourse factoring requires the trucking company to pay the factoring company back if the customer does not pay. Non-recourse factoring means the trucking company does not have to pay if the customer does not pay the invoice.
However, you should carefully review the terms with non-recourse factoring. Most non-recourse agreements include narrow stipulations for when non-recourse applies. Some companies only accept non-recourse in specific situations, such as the client’s business going bankrupt. In most cases, if a client doesn’t pay an invoice, your company is still on the hook, even if you have non-recourse factoring.
Non-recourse is also more expensive, usually requires more extended contracts, and approval of factored invoices is more stringent. It could be worth the extra cost if you have clients on the verge of bankruptcy, but for the most part, the limited protection doesn’t justify the additional cost.
Unique Features for the Truckers
The trucking industry utilizes invoice factoring more than any other sector. As such, several factoring companies either cater to the industry or work exclusively with truckers.
Many transportation factoring companies develop special programs and incentives specific to freight companies. Some offer unique features like:
- Fuel card programs, fuel discounts, and fuel advances
- Commercial truck insurance
- Free credit checks on clients
What are the Best Freight Factoring Companies?
We wish we could tell you the definitive best factoring company, but finding the right freight factoring company for your business depends on your business’s specific needs. Your factoring company should be a partner and someone you trust.
Look for companies with excellent online reviews and transparent fees and terms.
Here are 4 of the most popular factoring companies for trucking.
OTR Solutions
OTR Solutions (formerly OTR Capital) is one of the leading trucking factoring companies for the transportation industry. The company offers additional services such as equipment financing, insurance, fuel cards, and tax assistance. It also provides a fuel advance program. OTR Solutions is headquartered in Georgia.
Complementing their flexible factoring services, OTR offers a convenient online portal to check your customers’ credit. Simply enter the MC number to find the results you need.
Going along with the online portal, OTR also offers a mobile app. Customers can use the app for uploads, processing data, and adding notes.
OTR does not have monthly minimums, credit restrictions, or volume limits. It offers both recourse and non-recourse factoring.
The company offers a consistent flat factoring rate and doesn’t have hidden charges or fees. OTR offers customized factoring programs to meet a business’s unique needs.
Apex Capital
Apex is a leading invoice factoring company for trucking, with a reputation for fast funding on advances and excellent customer service. It offers both recourse and non-recourse factoring. The company is based in Texas, but offers services nationwide.
The company provides access to its free Account Manager Portal (AMP) anytime. It also provides a mobile app with image capabilities for factoring on the go.
There are no monthly minimum volume fees or early termination fees. Apex provides free credit checks. You should know that Apex does whole ledger factoring, meaning customers must factor all their invoices. Many companies let you choose which invoices to factor.
The Apex Fuel card offers an average savings of 47 cents per gallon.
Riviera Finance
Riviera Finance offers non-recourse factoring services and is one of the longest-running factoring companies available. The financial technology company provides a unique credit guarantee that sets them apart from other factoring companies. Its headquarters are in California.
The company’s credit management service guarantees credit on all invoices, so Riviera Finance assumes the risk as the credit manager. Companies factoring invoices through Riviera get peace of mind knowing they are not responsible if a customer doesn’t pay their invoice.
Riviera Finance offers a convenient online portal with 24/7 access to your invoice information. The company uses integrated tools to provide support as an accounts receivable partner.
It’s also a good option for businesses that need funds quickly. Once approved, the company provides funding for invoices within 24 hours. Advance rates go up to 95%.
RTS Financial
RTS Financial provides small business factoring for a wide range of industries but offers special incentives for freight businesses. In addition to helping solve cash flow issues, RTS provides a desktop and mobile app to help trucking businesses manage day-to-day operations. The company is based in Kansas.
The company offers a fuel card program for trucking and freight businesses. It can provide up to 97% of the invoice’s value and provides same day business funding in some cases.
The main drawback of RTS is that it doesn’t provide rates upfront. You need to apply or speak to the sales team to discover the fees that would apply.
How to Apply for Freight Factoring:
If you’re ready to pursue load factoring today, you can apply directly through United Capital Source. Follow these instructions to apply.
Step 1: Make Sure Your Customer is Reliable
Freight factoring only works when your customers pay their invoices on time and in full. Ensure your customers will pay before contacting a load factoring company.
Step 2: Gather Your Documentation
When you apply, the factoring company needs to review the following documents:
- Driver’s license.
- Voided business check.
- Bank statements from the previous three months.
- Business tax return.
- Accounts receivable aging report, Accounts payable report, and debt schedule.
Step 3: Apply
You can complete our one-page application or give us a call to apply. Either way, you’ll need to provide the information above and the invoice amount you want to sell.
Step 4: Speak to a Representative
Once you apply, one of our representatives will reach out to discuss the best options for your trucking business. The call will cover the factoring rate, fees, and terms attached to the sale. You’ll get an upfront breakdown of all costs, so you don’t have to worry about hidden fees.
Step 5: Receive Approval
The entire process takes about two weeks to finalize. Funds will appear in your bank account 1-2 days after completing the application process.
What are the Advantages of Freight Factoring?
The primary advantage of truckload factoring is getting paid fast and on your terms. Converting unpaid invoices into working capital helps trucking companies stay ahead of expenses. Several companies provide comprehensive services to meet all your factoring needs, including same-day funding.
Factoring truckloads creates consistency when you receive your money instead of waiting for payments. The predictability helps you plan ahead and stabilize cash flow.
The factoring company also takes some of the backend work off your plate. Once you factor a truckload invoice, the factoring company handles the billing and collections work. Instead of filing paperwork, you get back out on the road, earning money on the next haul. This additional back office support can help trucking businesses focus on core services.
Factoring is not a loan, and your business doesn’t incur any debt. Qualifying for factoring is also much easier than a traditional business loan. Many trucking factoring companies offer additional perks, such as a fuel card.
What are the Disadvantages of Freight Factoring?
The most significant disadvantage is the cost. The rates and fees are high compared to a traditional business loan. Some factoring companies also charge sign-up fees.
Factoring companies partially base their fees on how long it takes for your customers to pay. For example, an invoice with a 60-day due date incurs a higher fee than a 30-day invoice. In addition, late payments usually incur additional fees.
Some factoring companies notify your clients when they acquire the invoice, potentially damaging your business-client relationship. Look for factoring companies that don’t require notification factoring. United Capital Source doesn’t use notification factoring.
Trucking Factoring Pros & Cons:
Pros:
- Fast access to working capital from unpaid invoices.
- Predictable cash flow helps with budgeting and planning.
- Same-day funding is available with many factoring providers.
- Factoring companies handle billing and collections, saving time.
- No debt is incurred since factoring is not a loan.
- Easier qualification compared to traditional business loans.
- Extra perks may be available, such as fuel cards.
Cons:
- Higher fees compared to traditional business loans.
- Some factoring companies charge sign-up and additional fees.
- Fees increase the longer it takes customers to pay.
- Late customer payments can lead to extra costs.
- Notification factoring may strain client relationships.
Frequently Asked Questions
Here are the most common questions about factoring companies in the trucking and freight industry.
Is Factoring Worth it for Trucking Companies?
Factoring companies provide flexible options that allow truckers to factor only the invoices they need at given times. Factoring might be worth it if a trucking company continually falls behind on cash flow, but has the money available in outstanding invoices. Some trucking companies have the working capital to wait for clients to pay.
The answer comes down to whether gaining access to that working capital justifies the cost. Cash flow interruptions can derail an entire business operation, and in those cases, the cost is worth it to keep the business afloat. Many factoring companies offer mobile apps for invoicing and tracking payments.
Can I Get Freight Factoring with Bad Credit?
Yes, it is possible to get freight factoring business loans with bad credit. Since the factoring company gets paid when your customers and brokers pay their invoices, it cares more about their credit history. Most trucking companies that have customers with good credit can qualify for freight factoring.
Some factors don’t have any credit score requirement. One of the main benefits of factoring is the lower credit requirements compared to other business financing options.
What If Factoring Doesn’t Work for my Trucking Business?
Freight factoring isn’t the right fit for every business. There are several reasons factoring might not work for a company.
Some trucking companies’ clients are too unreliable for credit approval. Or for some companies, the cost is too high.
There are several small business financing options if factoring doesn’t work for you. Many offer competitive rates compared to factoring.
Let’s look at some of the best small loan options for trucking companies.
Equipment Financing
Trucking companies and owner-operators require commercial trucks and specialty equipment. Equipment loans go up to $5 million per piece of equipment, making it a feasible way to acquire a truck or a fleet of trucks.
Business Lines of Credit
A business line of credit operates like a credit card. You get a set credit limit and draw funds as needed. You then repay the amount with interest in weekly payments. Having a business line of credit helps trucking businesses cover unexpected costs.
Working Capital Loans
Invoice factoring is a form of working capital financing, but several loan options are also worth considering. Working capital loans help cover everyday expenses in the transportation industry.
Revenue-Based Loans
A revenue based business loan is an upfront amount of cash based on your average revenue. Repayment comes from a fixed percentage of future revenue coming into your business. This form of financing is an excellent option for businesses with fluctuating revenue since the payment adjusts with your revenue stream.
Other Small Business Loans
If your company needs larger or longer-term business loans, you can also consider the following:
Freight Factoring Company Final Thoughts
Freight factoring is a viable business solution for trucking companies that must turn outstanding invoices into working capital. The costs are higher than traditional business loans, but immediate cash access might be worth the cost.
We should caution you to be careful when selecting a factoring company. You want a partner who understands your business industry.
Some factoring companies are just out to make a quick buck and tack on hidden fees and stipulations. Carefully review the terms and conditions before signing a factoring agreement.
United Capital Source is always upfront and transparent on fees. You will know the total costs involved. Contact us to discuss the best financing program for your trucking business, or see our invoice financing resources.
