Typical Freight Factoring Terms You Should Know
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Fact-checked by: Bruce Sayer
Reliable access to working capital is a critical necessity for any trucking company. The choice to start factoring freight bills to support operations and fuel growth is a sound business decision. The next important action is to select the right factoring company for your trucking business. Selecting the best factoring company for trucking should be managed much like hiring an employee – research the candidates, interview them and choose accordingly.
In order to have a complete understanding of how factoring works, it is very important to understand the basic terminology and the principle concepts of freight factoring. With this understanding you will be able to ask better questions and make an informed decision when choosing the best invoice factoring company for your trucking business.
For simplicity, it is best to first define the three main participants of a factoring arrangement. They are:
Factoring Company: A company that provides invoice factoring services. Also known as the factor.
Client: The trucking company who sells their invoices to a factoring company. Also known as the client company.
Customer: Also known as the debtor. A business that utilizes the services of the client and remits invoice payment to the client’s factoring company.
Freight Factoring Terminology
The following is a comprehensive list of typical freight factoring terms and definitions you should know when discussing and assessing a potential relationship with a factoring company. The list is organized alphabetically for easy reference:
Account Debtor: Also known as the customer – a company that purchases trucking services and remits payment of invoices that are factored by the trucking company.
Accounts Receivable (A/R): Outstanding money that is owed to the client by the client’s customers. This money is usually in the form of an invoice that is due to be paid in a certain period of time.
Accounts Receivable Factoring: Also known as A/R factoring, factoring or general factoring. Factoring designed specifically for trucking companies is referred to as freight factoring.
Advance: The amount of money that the factoring company advances to the client when they buy their invoice. The advance is usually a percentage of the gross invoice value and is advanced to the client soon after the invoice is purchased.
Advance Rate: The percentage of the invoice that will be advanced to the client. This rate often varies between 70% and 95% of the gross invoice value.
Bad Debt: Debt that is unlikely to be collected. Unpaid invoices (an example of bad debt) is often paid for out of the client’s reserve account and or sold to a collections agency.
Cash Advance: An amount of money advanced to the client before the load has been delivered.
Client: A trucking company who sells their invoices to a factoring company. Do not confuse this with term “customer.”
Closing Costs: Costs involved in becoming a factoring client. Some factoring companies have no closing costs. Other factoring companies charge the cost as a percentage of the total factoring line amount. The closing costs are also referred to as the setup costs.
Collections: Payments that the factor receives for invoices factored by the client.
Concentration: The maximum amount for which a factor will fund on a single customer in a client’s portfolio. This is often expressed as a percentage of the factoring volume for a given customer. Concentration is used as a risk management measure to ensure that a large majority of a client’s portfolio is not represented by a single customer.
Credit Limits: The factoring limit that is placed on each of a client’s customers by a factor. This is usually determined by their credit rating and possible concentration limits.
Credit Protection: A facility that covers the client against potential losses for unpaid invoices. Usually in the form of a credit insurance policy.
Credit Terms: A commercial sale that allows the customer to pay a certain number of days after an invoice is submitted.
Current Account: The total amount of funds paid to a client including any charges at any given time.
Customer: A company that purchases products or services from the client and remits payment of invoices that are factored by the client. Also known as the account debtor.
Day Sales Outstanding (DSO): A calculation used by a company to estimate the average time it takes their customers to pay.
Dedicated Account Manager: A client’s main contact with a factoring company and the manager of a client’s factoring account. A dedicated account manager is used by a factoring company in order to build a relationship with the client to better understand their needs.
Disapproval: When the funding of an invoice is not approved.
Dispute: A situation where an invoice is not paid by the customer due to a problem with the service or invoice.
Factoring: A form of business funding where a company sells their invoices to an intermediary called a factoring company in order to finance their accounts receivable.
Factoring Agreement (Factoring Contract): A formal contract issued to the client that states the terms of the factoring agreement.
Factoring Company: A company that provides factoring services.
Factoring Fee: The fee charged by the factoring company to finance a client’s invoices. This fee is usually a small percentage of the gross value of an invoice.
Fuel Card: A card issued to a trucking company that provides a discount on the cost of fuel. Reputable factoring companies typically provide this as an additional service to their client companies.
Funding Limit: The maximum amount of money that a factoring company can fund to a client’s account.
Funding Period: The time period from the purchase of the invoice to the customer paying the full invoice amount.
Invoice Discounting: Another term for factoring.
Invoice Factoring: Another term for factoring.
Non-Notification: A form of factoring where the customer is not notified that their payments should be paid to a factor. In this situation the customer believes they are paying the client when in fact they are actually sending payments to the factoring company.
Non-Recourse Factoring: A form of factoring where if a client’s customer doesn’t pay, the factoring company will absorb the cost. Most factoring companies that provide non-recourse factoring are only willing to pay if the client’s customer files for bankruptcy or declares insolvency.
Notice of Assignment (NOA): A notice that is sent to customers notifying them that the client’s invoices should be payed to the factor.
Notification: The process where the factor legally notifies a client’s customer that payments for the clients work should be made to the factor. This is usually done through the sending of a NOA.
Rebate: Also called the “reserve.” The balance owing that is paid to the client when the client’s customer pays the invoice.
Recourse Factoring: This is the most common form of factoring where if the client customer doesn’t pay, the client is responsible to buy back the invoice from their factor.
Reserve Account: A client account where a small amount of each factored invoice is deposited. This is usually used as insurance to offset the cost in case one of a client’s customers doesn’t pay their invoice.
Reserve Amount: The percentage of the invoice that is deposited into the reserve account.
Same Day Funding: Receiving advance payment on invoices within 24 hours of submitting an invoice for funding.
Schedule of Accounts: It’s a form that is used by the client to submit their invoices to their factor for funding.
UCC: The Uniform Commercial Code (UCC) is a financial document used between businesses who are lending and borrowing money. It is a uniform act that harmonizes the law of sales and commercial transactions in the 50 states.
Verification: The process of checking an invoice’s validity, amount and payment address prior to being funded. This is usually done through a phone call with a client’s customer.
Working Capital: The capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
With the above knowledge of factoring terms and a good understanding of the basics of factoring invoices, trucking companies are well prepared to talk with factoring companies to discuss a potential relationship.
How to Choose the Right Factoring Company
Partnering with a finance company is a vitally important decision and a serious commitment, one that should not be taken lightly. Interview each potential factoring company and determine if it is the best fit for your trucking business. Following are the conditions of the relationship to consider:
- Factoring Fees – Is the cost of factoring competitive?
- Speed of Funding – Is funding fast, reliable and easy to manage?
- Service – Is the factor responsive and convenient to work with?
- Contractual Terms – Are there any hidden costs or restrictive terms? Does the factor offer a no-obligation trial period?
- Trust – Is the factor knowledgeable of your business, transparent and processes funding without delay?
Knowing how to choose the right factoring company that is best suited for your trucking business is the first step in securing the financial support needed to grow your company and succeed.
Growing with Freight Factoring
Once you have entered into a factoring relationship, your trucking company is financially well positioned to respond to opportunities as they develop. With flexible funding at your disposal, your operations can react to customer demand without the normal constraints imposed by bank financing. With freight factoring, the more invoices you generate, the more funding becomes available. You can now operate and grow your business knowing that the working capital needed to support growth is readily available.
For more information about freight factoring and how it can help your business succeed, visit eCapital.com
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ABOUT eCapital
Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.
We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.
eCapital Corp
eCapital Corp. is committed to supporting small and middle-market companies in the United States, Canada, and the UK by accelerating their access to capital through financial solutions like invoice factoring, factoring lines of credit, asset-based lending and equipment refinancing. Headquartered in Miami, Florida, eCapital is an innovative leader in providing flexible, customized cash flow to businesses. For more information about eCapital, visit eCapital.com.