What is Freight Factoring in Trucking? Pros & Cons
Christine Kunz
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Let’s be real—waiting to get paid is painful. The traditional wait of 30-60 days to pay for a hauled truck load makes zero sense.

Some brokers offer quick pay options to help mitigate this pain, but rates and payment timelines vary broker to broker that become more difficult to track as you haul more loads.

When you are running a trucking business, waiting to get paid may mean missed bill due dates and the inability to pay for necessities like fuel and maintenance. Maintaining a healthy cash flow is critical for staying in business and living (relatively) stress free.

With quick pay, owner-operators need to be meticulous about documenting or remembering each broker’s various fees, payment timelines, and billing process. When time is money and spending more time driving is critical, having to spend hours following up and dealing with ensuring they are paid can make or break a business. 

One effective solution that both small and large trucking companies rely on is truck factoring, also known as transportation factoring or freight factoring. With the right factoring company, you can get the same rate for every invoice, follow the same process, get paid same-day pay, and someone else to manage collecting from brokers.

What is freight factoring?

Freight factoring is when a trucking company or owner-operator sells their invoice to a factoring company that’s experienced in collecting and processing accounts receivable (i.e., invoices). In exchange for paying the trucking company for their invoice on the same day or within a few days, the factoring company typically keeps a percentage of the invoiced amount as a fee for their services.

What are the benefits of freight factoring for trucking companies?

Freight factoring turns invoices into immediate cash and eliminates the waiting of weeks or months to get paid after each load has been completed. In addition to improved cash flow, trucking companies and owner-operators benefit from simplified billing and collections as well as reduced administrative back-office work.

Freight factoring benefits for trucking companies:

Get paid within hours. Truck drivers can get instant cash flow by getting paid often within the same day as completing a job. This is faster than quick pay, which takes three to seven days to get paid. Keeping cash readily available is key for paying for timely costs like fuel, payroll, maintenance, and repairs. 

Simplified billing and collections. By delegating the task to a trusted factoring partner, factoring companies do the thankless job of handling broker outreach, invoice payment, processing, and collections.

Reduced administrative back-office work. If an owner-operator is managing their trucking business all by themselves, or work with a small team, they need to focus on driving and making money. Drivers need to spend less time chasing down invoices and shuffling paperwork back and forth with brokers and shippers. Factoring companies will do the follow-up, including managing calls and emails, billing, and collections for invoices. 

Mitigated risk. Factoring companies will qualify brokers so trucking companies aren’t at risk for non-payment. Factoring companies perform credit checks on an ongoing basis to ensure brokers are reliable. Your factoring company will have a list of who is reliable. If the broker is not on the list, drivers can choose not to work with the broker or ask their factoring company to perform a credit check. This allows drivers to make an informed decision on whether to work with the broker. 

How do factoring companies benefit?

Factoring companies take a percentage of the invoice when purchasing from a driver, which translates to profit when they later collect from the broker or shipper. 

Trucking companies sell their accounts receivable (invoices) to a third-party factoring company to get paid on the same day or within 2 days. In exchange for this service, the owner-operator gives up a 2%-10% of the invoice to the factoring company. 

For example, TruckSmarter charges a 2% flat rate to drivers who want to get paid within 24 hours of completing a load. 

What makes a company suitable to provide factoring?

Factoring companies have the financial ability to wait for a payment rather than a small trucking company that needs to get paid immediately to pay for expenses. 

What if a broker does not pay my factoring company for the invoice they purchased from a trucking company?

This is a major risk for factoring services. That is why they need to vet and approve every trucking company and broker they choose to work with. Factoring companies perform credit checks and other due diligence to gauge whether brokers they work with can and will pay for an invoice they purchase.

How does Freight Factoring work? 

A 10-step, step-by-step guide from factoring qualification to invoice payment and collections:

1. A trucking company or owner-operator chooses a dedicated factoring company.

2. The trucking company is vetted by and approved to factor with the said factoring company.

3. With trucking company approval, the factoring company helps a trucking company set up an account so they can pay the trucking company within hours of all future invoice verifications.

4. The trucking company notifies brokers and shippers about the factoring arrangement. 

5. Driver delivers the load for the broker or shipper and receives a signed invoice.

6. Driver submits their signed invoice, rate confirmation, bill of lading (BOL), and other paperwork for the hauled load to the factoring company.

7. The factoring company verifies the delivery with the brokerage.

8. After they’ve verified, the factoring company advances the driver a percentage of the invoice’s value by depositing the payment in their banking account.

9. Driver will receive the amount of the invoice, minus the previously agreed upon factoring rate that the factoring company keeps in exchange for its services. 

10. The factoring company takes on all back-office work and spends the following weeks or months collecting invoice payment from the broker or shipper.

How much of a cut do Truck Factoring companies take?

The percentage can differ from company to company and may fluctuate depending on a trucking company’s fleet size, how soon they want to get paid, and whether there are additional applicable service fees.

However, some factoring companies keep it simple and transparent, meaning they do not charge additional fees or offer variable rates depending on fleet size. For example, TruckSmarter charges a flat 2% rate whether trucking companies have one truck or hundreds, pays within 24 hours, and does not charge additional fees beyond the 2% rate. 

What to look for when choosing a factoring company.

Variable rates: some companies charge different rates based on the number of trucks a company has in their fleet and/or based on how quickly they want to get paid. Look for companies that have flat rates so you’re never blindsided. 

Hidden or additional fees: Some factoring services charge additional, hidden fees for their service, on top of the advertised factoring rate. Fees can range from set up fees, aging fees, per invoice fees, swipe fees, and transfer fees. Look for transparent, easy-to-understand companies that do not charge additional, hidden fees.

Contract terms: Some factoring companies lock trucking businesses into annual contracts. Look for factoring services with no annual contracts. Month-to-month is the current golden standard.  

Customer service: Some factoring companies will lead trucking businesses down a rabbit hole of holds and unhelpful representatives. Look for companies that are based in locations with similar time zones and that can give clear answers before signing their contract.

Industry expertise: Some factoring companies have very little experience which may cause drivers to be responsible for repaying their invoices and/or ruin their reputation with brokers and shippers. Look for companies that have hundreds if not thousands of happy customers. Ask if you can speak with a current customer of the factoring company to get their honest feedback. 

Easy-to-use technology: The trucking business comes with a mountain of paperwork and inefficiencies. Look for a company that helps trucking businesses easily submit invoices, see the status of invoices, and get paid all in one place. 

Contract termination terms. Some factoring companies will lock trucking companies into year-long or multi-year contacts. To end the deal, they need to give notice before the end date. Trucking companies need to make sure they understand what happens if they terminate a contract when there are still invoices that the factoring company has not yet been paid for. Look for a factoring company that does not lock trucking companies in. 30 days, month-to-month is currently the most flexible contract termination option on the market. 

What is recourse Factoring? 

In a recourse factoring agreement, a trucking company or owner-operator is responsible for buying back the invoice if a broker or shipper doesn’t pay your factoring company. A truck driver may choose a recourse factoring agreement in exchange for a lower factoring rate. 

What is non-recourse Factoring?

In non-recourse factoring agreement, a factoring company assumes the risk if the broker or shipper defaults on their invoice payments for certain situations, like if the broker or shipper goes bankrupt. This means, if the broker or shipper goes out of business, the truck driver’s business and credit are safe and they do not have to repay the factoring company. 

What is a buyout?

If a trucking company or owner-operator is in a contract with a factoring company but wants to switch to another, the new factoring company may buy (i.e., buyout) any outstanding invoices that the trucking company has with the current factoring company.

Top 10 questions should trucking companies ask before choosing a factoring company?

1. How do you determine the rate I will pay?

2. What other fees might I get charged?

3. Do you file your UCC on all my assets or just accounts receivable?

4. How quickly can I get paid?

5. How do I access my money?

6. What is covered by your recourse and non-recourse policies?

7. Which brokers are factorable and how quickly do you review requests to factor a broker?

8. What are your contract termination terms?

9. Do you hold reserves and how do you manage them? 

10. Do you have minimum requirements to keep my rate and factoring account open?

You can find a complete list of questions here.

To sum it up

Freight factoring involves selling invoices to a factoring company that specializes in collecting and processing accounts receivable. In return for immediate or near immediate payment of an invoice, the factoring company keeps a percentage as a fee. There are several benefits of freight factoring, including faster payment, simplified billing and collections, reduced administrative work, and risk mitigation. However, trucking companies needs to consider factoring rates, fees, contract terms, customer service, and technology when choosing a factoring company.

Choosing whether to factor and selecting a factoring company are big decisions. We hope this post provides you a good overview of freight factoring in the trucking industry as well as its pros and cons. 

To learn more about freight factoring, visit trucksmarter.com/factoring or contact our Chicago-based factoring team at factoring@trucksmarter.com.