What Is Factoring in Trucking? A Guide to Freight Factoring

Budget management can be challenging for trucking companies. We know it, because FleetCare offers freight factoring services for trucking businesses of different scales, big and small. Truck factoring is a convenient way to manage fleet budgets and optimize spending.

This guide will explain what factoring is in trucking, how it works, and what to consider when choosing the best truck factoring company for your business.

What Is Factoring in Trucking?

Truck factoring is a process where a third-party company buys unpaid invoices from a carrier to provide it with instant cash. This is convenient both for bigger fleets and owner-operators, as truck factoring allows them to not rely on bank loans or credit. Freight factoring also diminishes the need to wait until payments come through and allows for stable cash flow to widen operations.

And yes, factoring comes with additional fees, but this is still a fair trade-off for stable cash flow. Instead of waiting until your customers pay for provided services, you can receive instant money to work with more loads.

How Does Freight Factoring Work

The principle is quite simple. After you receive a load invoice, you send it to a factoring company, and it pays you the earnings in a few business days, withholding its fees. The moment the invoice is sent to a factoring company, you are technically free from financial responsibility.

Why “technically”? The nuance lies in the type of freight factoring you work with: recourse or non-recourse.

Recourse vs Non-Recourse Truck Factoring

Recourse truck factoring is the most widespread option. It offers lower fees, but doesn’t cover all the risks. If you sell the invoice but the customer doesn’t pay in time, you have to buy that invoice back. This means you still have to collect the payment for the load, but in that case you have to do it on your own. This is why this type of factoring comes with lower fees 一 you have to evaluate risks by yourself and act on them accordingly.

Recourse factoring comes with obvious benefits:

• lower fees;
• easier approval;
• less paperwork (unless a shipper or broker doesn’t pay you on time).

The main downside is the responsibility to buy back invoices that weren’t paid on time, which can cause certain financial issues if the buyback is large enough.

Non-recourse truck factoring is different. In that case, the factoring company does risk evaluation by itself where it applies. The risk factors it can cover are in the contract, and you don’t have to buy the invoice back if it’s not paid on time due to a reason covered by that contract. For example, if a shipper or broker entirely stops operations and goes out of business, you’re not financially responsible. This obviously comes with higher factoring fees.

The advantages of non-recourse truck invoice factoring include:

• financial protection against non-payment;
• significantly reduced paperwork;
• more predictable operations.

That being said, you also have to consider the downsides:

• higher fees imposed by the factoring company;
• limited range of risk factors covered;
• stricter approval criteria since the responsibility fully lies with the factoring company.

The fee difference is the deciding factor for most truckers. But when choosing between recourse and non-recourse factoring, you also have to consider the risks. Working with reliable shippers and brokers lowers the non-payment risk, but if you’re a smaller company, higher fees for non-recourse factoring can protect you from a serious debt if non-payment occurs.

Keep in mind that non-recourse factoring services seldom cover certain events in contracts. This includes invoice disputes, contract breaches, and events where you influenced the issue.

Choose recourse freight factoring if you’re confident in your brokers and their customers. It’s a more affordable option as well.

If you need extra confidence in your cash flow, non-recourse factoring works best for you. It comes with higher fees but better protection.

Benefits and Limitations of Freight Factoring

Truck factoring for owner-operators and bigger companies is advantageous in its nature. But if we were a trucking business considering this option, we’d have to consider all benefits and drawbacks.

Why Truck Factoring is a Good Idea

Let’s start with cash flow. Factoring gives you easy access to money without disrupting your fleet operations. Send the invoice and receive funds in a short time 一 it’s easy and convenient. You don’t have to have a good credit score to be eligible for factoring, because it’s not the bank lending you money. A factoring company simply pays you for the invoice, and that’s it.

Truck factoring also noticeably reduces the back-office work. A solution like that has a significant impact on bigger companies with a higher number of invoices and a larger fleet. Instead of processing every invoice yourself, you delegate this task to a third-party company. 

Factoring companies can also check the credit scores of your potential customers to assess the risk. This comes in handy when considering loads from new or unknown customers.

What Limitations You Should Be Aware of

Not necessarily a limitation in their nature, but fees are something you can’t ignore. The trade-off for fast payments and smooth operations is the percentage that the factoring company takes to provide their services. And some fees can get high, depending on the company and type of services they provide.

You have to as well consider payment issues the factoring contract covers. Some companies cover a variety of non-payment events, but some also limit that list to brokers or shippers abruptly going out of business.

Freight Factoring Rates, Reserves and a Net Payout Example

Factoring rates can be flat and variable. A flat rate is a set one, while a variable rate can grow while the invoice remains unpaid. These rates apply to each invoice a factoring company buys from you. And naturally, the higher the monthly invoice volume, the lower the fee.

So, what influences factoring rates?

1. Your customer’s credit score. Better credit history means lower risk for a factoring company, so they can charge you lower fees for invoices.
2. Invoice volume. The more transactions you have monthly, the easier it is for a factoring company to spread costs. This means lower rates.
3. Contract length. If you commit to working with a company for long enough on exclusive terms, chances are high you can get lower rates for their services.
4. The terms of payment. Longer payment periods can cost more because a factoring company has their capital tied up for longer. Shorter terms come with slightly lower rates.
5. Type of factoring agreement. We’ve covered this earlier in the article: recourse factoring assumes your responsibility for risk assessment, and non-recourse factoring services cost more because the company assesses the risk on its own.

Now let’s see what the payment structure looks like for a $2,000 invoice with a 2% rate. 

Invoice amount	Factoring fee at 2% rate	Your net payout	Reserve
$2,000	$40	$1,860	$100

The reserve is calculated based on the complement of the advance rate. For this example, we used a 5% reserve rate. Reserve is what the factoring company withholds until your customer completes the payment. When the payment is through, the reserve amount comes back to you.

How to Choose a Factoring Company

You should consider factoring services for your fleet, as they will provide you with stable funding. Stable fleet maintenance and better operations are the main benefits, and factoring is an affordable way to achieve that. Truck factoring also lets you save more money on taxes, providing tax benefits.

Start by choosing a factoring company by understanding your needs, and then do thorough research. 

If a company provides additional services like dispatch and logbookkeeping, it is worth looking into. This way, you can synchronize your operations efficiently and reduce paperwork even more.

An important thing to check while choosing a factoring company is contract transparency. Are their terms explicit and fees clear? This part is probably the most important.

Some companies offer fuel cards with discounts and advances 一 that’s an additional way to save more money. Best if the support like that extends to reliable and always available customer service.

Conclusion

Truck factoring can become a big positive change for your company. With factoring, you can improve cash flow and streamline operations without worrying about payouts. 

FleetCare factoring services allow you to expand your trucking business through accessible money and reduced paperwork. Contact us now to learn more about our terms and rates!