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Freight Invoice Factoring 101: Solving Your Cash Flow Problem

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Managing cash flow is crucial for your trucking business. Truck payments, fuel, maintenance, payroll, insurance, and taxes are costs that don’t go away.

We know you need a steady income to survive and grow. But how can you run daily operations while waiting 30, 60 or 90 days for payment of loads you’ve already delivered?

Are you turning down loads due to the lack of cash? Are you letting maintenance slide by? And how do you keep track of those unpaid invoices while neck deep in the everyday demands of trucking?

The easy solution is factoring.

In this guide, we will show you how freight invoice factoring can get you cash now. We’ll also fill you in on what you need to look for in a freight factoring company, the benefits, and the costs. That way you can make an informed decision for your trucking business.

What is freight invoice factoring?

Freight invoice factoring is a simple way for owner operators, small and large fleet owners, and brokers to sell their unpaid invoices to a factoring company at a slight discount. You get to infuse cash into your trucking business right away. No more waiting weeks or months to get paid.

Sound crazy? It’s not.

According to Overdrive Magazine the use of invoice factoring among owner operators has grown 62.5% in the last 8 years.

Simply put, freight invoice factoring gives you up to 98% of your unpaid invoices within 24 hours so you can get back on the road. No more turning down loads. By partnering with a factoring company, you can keep your wheels turning and continue growing your business every day.

You have two invoice factoring options

There are two different types of factoring plans available to your trucking business. We’ll explain the difference, so you can choose the best plan for your operation.

Recourse Factoring

With the recourse factoring plan you take the risk of non-payment of invoices by your customers.

For example, you submit an invoice and your factoring company advances cash. But your customer doesn’t pay for any reason. You are on the hook to pay your factor the advance plus any associated fees. The factor has legal recourse to collect the unpaid invoice from you.

Because you’re accepting the risk, you can get a lower factoring rate.

Non-Recourse Factoring

With the non-recourse factoring plan, the factoring company takes the risk of your customers not paying due to insolvency or bankruptcy. So you pay a slightly higher factoring rate.

For example, you submit an invoice and your factor advances cash. If your customer doesn’t pay due to insolvency or bankruptcy, the factoring company takes the hit and you don’t have to repay the advance. But, suppose your customer fails to pay because of freight claims or any other issues. Then you are liable for paying the advance back to the factor.

Which option is better?

The short answer is: it depends on you and your business.

Let’s delve deeper; if you’re new to trucking, you likely have to work with unfamiliar customers. Chances are, you won’t know them well enough to feel secure hauling for them. You may want to choose non-recourse factoring. Its slightly higher fee rate covers your risk of bad credit customers.

On the other hand, you may know your customers well and believe they are creditworthy. You may want to opt for recourse factoring to secure a lower fee rate.

The choice boils down to your trusting customers’ creditworthiness and your tolerance for risk.

Remember, both options work to solve your number one headache: lack of cash flow.

With freight invoice factoring, cash flow is immediate and continuous. And it grows as your business grows.

How does freight invoice factoring work?

Freight invoice factoring can quickly give your trucking business the boost it needs to grow.

trucker factoring process

Here’s a quick overview of how freight invoice factoring works:

1. Deliver the load.

You pick up the freight, deliver it, and get your paperwork signed.

2. Send over the paperwork.

Submit the invoice, rate confirmation, and bill of lading to the factor, who verifies load delivery. The factor then knows there are no freight claims or issues preventing payment.

3. Get paid in advance.

The factor buys your invoice and pays you up to 98% of that invoice within 24 hours. This is known as the advance. It is usually deposited directly to your bank account. Or, if you prefer, it can be applied to your fuel card.

4. Receive the reserve.

The unpaid remainder is called the reserve. You get it minus a small fee when your customer pays the invoice.

Some leading factoring companies provide an online portal and mobile app. You can easily submit your paperwork with a laptop computer, tablet, or smartphone from the cab of your truck before you even pull away from the dock.

You’re going down the road knowing you’ll have money in the bank within a day. What could be easier?

What are the benefits of freight invoice  Factoring?

Improving cash flow is the number one reason most companies factor their invoices. We’ve identified three types of trucking businesses who can benefit from freight factoring. They are Owner Operators, Fleet Owners, and Brokers.

types of trucking businesses
Owner Operators

Factoring provides a source of consistent funds and healthy cash flow. That’s why there is a trend where these truckers are turning to factoring in increasing numbers.

Generate cash flow immediately.

Factoring turns unpaid invoices on delivered loads into cash without waiting.

When you submit your freight bills to your factor, those unpaid invoices are converted to cash within 24 hours. You have your expenses covered and are free to haul more loads for those good customers.

Fuel advance.

Some factoring companies offer fuel advance as part of their factoring program. They will advance you the cash you need to pay for fuel before you deliver your load.

Save on fuel.

Good factoring companies partner with fuel providers. Once you are set up with a factor you can save on fuel like the big boys.

Say you drive 2,500 miles each week for 50 weeks (we all need a little vacation =)). You rack up 125,000 miles for the year. If your rig averages 6.5 miles to the gallon you use 19,231 gallons. If your fuel card gets you an average savings of 30 cents a gallon, you save $5,769 for the year. Imagine what you could do with savings like that.

No debt created.

Factoring your invoices is not borrowing. It is selling your unpaid invoices to the factor at a discount and your factor pays you the same day. Then the factor waits for payment from your customer. You have no debt from the transaction. It’s your money. You’re just getting paid faster.

Free credit checks on clients.

In trucking, there are times when you must work with unfamiliar clients. You just don’t know how solid they are. Factoring gives you free credit checks on potential customers, so you always know if a load is likely to get paid. It’s good business and a great stress reliever.

Gain access to a team of billing and collection experts.

All you need to do is submit your invoices to your factor, then keep on trucking. No accounts receivable to juggle and no waiting for payments. You get immediate cash and your factoring team of experts handles all your billing and collection needs. You get to drive more. Worry less.

Increased productivity.

Factoring gives you consistent cash flow. You have your expenses covered and can carry more loads. You’re saving time and using it to grow your company. As a result, you’re enjoying increased revenue.

Simple, fast approval process.

Getting approved for freight factoring is no sweat compared to applying for a loan or line of credit. No collateral is required, and your credit score is not important. Factoring is approved based on the creditworthiness of your customers. You get to enjoy a quick and easy application process.

Fleet Owners

Small and large fleet owners enjoy the same benefits as owner operators above, plus:

Predictable cash flow makes it easier to expand your business.

When your fleet is firing on all cylinders and cash flow is steady, it’s time to think about adding equipment and running more lanes. Factoring eases your cash flow pain and turns it into new business and more revenue.

Help ensure drivers are paid on time.

When drivers fail to get paid when due, their company loyalty and productivity fades fast. Factoring provides consistent cash flow to help pay drivers regularly. Now they are happy and that makes you happy.

Keep all trucks on the road.

Instant cash means you have the working capital to take care of truck maintenance and repair services. It keeps your trucks running perfectly to reduce downtime and lower overall maintenance costs.

Provides flexibility to offer new incentives to retain and attract drivers.

Finding and retaining qualified drivers will determine the health and success of your trucking company. Use the boost in cash flow from invoice factoring to create an attractive incentive package that creates security, loyalty, and respect.

Brokers

Brokers must manage customers, carriers, routes, weather conditions, deadlines, and sales. Brokers can have some of the same benefits as owner operators and fleet owners with invoice factoring, plus:

Carrier Payment Services.

Some factoring companies handle all your carrier payment processing, freeing you up to invest in your own business and secure more contracts. Simply submit your invoices and they’ll automatically fund your carriers with whatever payment terms they chose.

Access to expert billing and collection team.

Your factoring company takes over your billing and collections. You save time and money, so you can focus on running a profitable business.

Quick Pay to carriers.

You can retain the most qualified carriers by offering competitive quick pay options.

Increase working cash without incurring more debt.

By factoring you get the cash flow you need to pay carriers and build a cash reserve to support growth of your business without taking on additional debt. Factoring is not lending.

Advances for carriers.

Good factoring companies will provide fuel advances against invoices before the loads are delivered. It’s another value-added service you can offer your carriers. Great for keeping your carriers working and driving your business.

Fuel cards for carriers.

Through your factoring company you can offer your carriers fuel cards to save them thousands per truck each year at the pumps. A great business-building tool for you and them.

Flexible payment options.

Because you and your carriers are being paid quickly, you can extend favorable payment terms to good customers. The factor does the waiting for customer payments. You become important to those customers and drive more business for yourself through more and better loads.

Whether you are an owner operator, fleet owner, or broker there are many benefits to enjoy by using freight invoice factoring. It truly is a smarter way to do business.

How does invoice factoring companies determine the rates and fees?

trucker-infograph

The first question you might be asking yourself is how much it costs. Determining your rate is quite straight forward. All factoring companies use a few basic criteria to calculate the rate:

Your sales volume.

You qualify for lower rates when you factor a higher number of invoices. Some (not all) factoring companies require you to meet a minimum volume of invoices.

Number of customers.

Most factors love it when you have a variety of customers. You are more likely to be busy hauling freight no matter the season. Strive to diversify your customer base. You’ll get a better rate.

The size of your invoices.

Many small invoices cost more to collect than few large ones. If you run short hauls or less than truckload with drops, then expect a slightly higher rate.

How long it takes your customers to pay.

The longer it takes your customer to pay, the higher your rate. Be aware of the time value of money.

Your customer creditworthiness.

This is the main ingredient in the discount rate formula. Customers with solid credit gets you a lower rate.

Based on these criteria, rates are typically 1%-5% of the amount invoiced. The benefits of receiving immediate cash typically far outweigh the fee.

Here’s a typical factoring scenario:

You submit your invoices totaling $1,500. With a factoring rate of 2%, your cost to have money immediately is $30. You would get $1,470 in 24 hours or less.

Cash flow is king in the trucking business. Instant access to cash means you have the working capital to invest in your business. You can hire new drivers, upgrade your equipment, and cover operating expenses.

What should you look for in a freight invoice factoring company?

Now that you are aware of what freight invoice factoring is, the benefits that’s available to your trucking company, and some of the fees involved; the next logical step is to begin searching for the best factoring company to work with.

trucker-checklistHere’s a couple important items to consider:

How long have they been in business?

Look for a factoring company who is well funded and has an established track record of at least 10 years. You want a funding source that will automatically grow with you as your freight business expands.

Are they experienced in the trucking industry?

It’s a very complex business. Look for a factoring company that specializes in the trucking industry because they will understand how trucking works, knows your customers, and will work tirelessly to keep you on the path to success.

Do they offer an easy to use online portal and a mobile app?

Today’s leading factoring company should be able to provide you with best-in-class online tools and mobile apps to help you get funding with a click and provide a place where you can see the details of your account anytime.

How fast can you get cash for your unpaid invoices?

Once you are approved, any top-tier factoring company should be able to fund your unpaid invoices in as little as 24 hours.

What are their rates and fees?

Be absolutely certain about all the rates and fees upfront. Look out for any hidden fees. Ask as many questions as you can think of.

How much of the invoice can they advance?

If you are thinking about invoice factoring, then odds are you have cash flow problems. Look for a factoring company that can advance you as close to 98% as possible.

How flexible are their terms?

Look for a factoring company that gives you the freedom to factor on your terms. You should be able to decide when you want to factor and who you want to factor. Plus start or stop anytime.

Do they require original invoices?

Some factoring companies require you to submit original invoices. But the best factoring companies provides you with an easy online portal to submit copies of your invoices.

How do you qualify for freight invoice factoring?

It’s really easy to get approved for freight invoice factoring. Unlike a traditional lender, they aren’t interested in your credit score. You provide information about your customers and the factoring company checks the creditworthiness of those customers. That’s how factoring companies assess their risk.

To qualify, your transportation company must:

  • Be a carrier or freight broker,
  • Have all the proper documentation, authorities, licenses, and insurance,
  • Work with creditworthy clients,
  • And have freight bills that are free of liens.

That’s it. It’s that simple.

As you can see freight invoice factoring is a great solution to help trucking companies overcome gaps in their cash flow. By getting your invoices paid fast, you can haul more loads while improving your cash flow.