Cash flow is the lifeblood of any small business. While it’s ideal to run a business where you get paid upfront for every job, in the trucking industry that’s just not how it works. Instead, it’s common for trucking companies to deliver a load and then get paid 15, 30, 60, or even 90 days later.
In the meantime, there is fuel to be bought, and bills to be paid. And trying to keep track of who has paid, and following up on unpaid invoices adds another level of complexity to running a trucking business.
For all these reasons, truckers and fleet owners often outsource this part of your business to a factoring company. With factoring, you can get paid quickly and the factoring company will handle your invoices for you. All for a fee, of course.
Here’s how it works and what you need to know.
Understanding Factoring Companies for Trucking
In certain industries, trucking among them, invoice factoring is very common. With factoring, you sell your invoice to a factoring company (also called “the factor”). You can often get same-day payments for loads you have delivered and the factoring company then collects the invoice.
It’s also known as freight bill factoring, transportation factoring, or trucking factoring.
Here’s how it works:
You apply with a factoring company. The application process is usually quite simple. You will typically need to provide information about your trucking business, including your MC or USDOT number, business address, EIN, and a W-9 tax form. You may need to provide a copy of your CDL and/or Certificate of Insurance.
There may be a credit check (especially for recourse financing), but generally the factor is more concerned with your customer’s credit rating than yours, since that’s who will pay the invoice.
The broker that owes the invoice must accept a notice of assignment (NOA) indicating that the factoring company will be collecting invoices. That process may take a little time, which means it may take time to get paid on your first factored invoice with a specific broker.
You deliver a load and then share paperwork confirming the delivery (such as the load confirmation/proof of delivery) with the factoring firm so they can invoice the broker.
Depending on the factoring company’s turnaround time, you get paid (funded) in a matter of hours, or within a couple of business days. Funding will typically be deposited by ACH into your business bank account.
You are advanced a percentage of the invoice value, often referred to as the funding rate. There may be another percentage of the invoice held back as a reserve.
The factor will collect the invoice from the broker. If the terms are truly non-recourse (more on that in a moment), you don’t have to worry about collecting the invoice. In the case of factoring on a recourse basis, you could be responsible for repaying the advance in the event the invoice is not collectible.
The factoring firm will typically place a UCC filing on your business credit report that indicates it has a security interest in your invoices. While this doesn’t directly impact your business credit scores, it can affect your ability to get additional financing, so ideally the UCC filing should be released soon after the relationship with the factor is terminated. (Learn how to establish business credit here.)
You’ll get the final amount of the invoice, minus any reserve or fees, when the invoice is collected.
Recourse vs Nonrecourse Factoring
It’s important to understand the two main types of factoring: recourse and nonrecourse factoring.
With nonrecourse factoring, you do not have to repay the advance if the invoice is not paid. Costs are higher because the company factoring the invoice takes the risk. No minimum credit score is typically required as the creditworthiness of the customer that owes the invoice is the important factor.
With recourse factoring, you must repay the invoice if it is not paid. You can get better rates but there is more risk for your business.
Nonrecourse factoring carries less risk to your trucking business, but the cost is higher. Recourse factoring means more risk to your business, but the cost is lower.
Of course, even with nonrecourse factoring you may be responsible if your invoice is later determined to be inaccurate or there is a valid dispute.
Key Benefits of Trucking Factoring Services
Factoring is popular in the trucking industry because of the benefits it offers. These include:
Improved Cash Flow
Improved cash flow is one of the top benefits of invoice factoring. The business owner doesn’t have to wait 15—60 days or longer to get paid for work that has been completed. Factoring often allows the business to get paid in hours, or at the longest, a day or two.
No Debt Incurred
Factoring is not a loan. That means you’re not incurring debt, and you don’t have to make periodic payments.
Factoring can be flexible; the business owner may be able to choose which loads to factor and decide when to stop factoring. However, some contracts impose restrictions so you should carefully read the terms of your contract to understand any limitations or notification requirements. You may need to complete a notification of termination and provide a certain amount of advance notice.
Simplify Your Business
When you assign your invoices to the factoring company, they manage collecting invoices for you. This can save you time, as well as the hassle of trying to track and manage outstanding invoices.
Selecting the Right Factoring Company
Factoring can be a valuable tool for your business but you want to pick the right partner. It’s a good idea to talk to two or three firms about your specific needs to find the one that’s the right fit for your business. Here are some points to consider:
You may be able to get factoring through a bank or factoring company. It’s generally best to work with a factoring company that specializes in the trucking industry and understands its unique needs.
Because they are experts in the trucking industry, many of the best truck factoring companies have built in other benefits that can help you run your business better. These may include fuel card programs with fuel discounts, discounted tires, back office support and more.
Some factoring companies will provide free credit checks and credit monitoring to help you evaluate freight brokers before you accept a load. They want to factor invoices where they will be able to collect, and this helps both you and them ensure that happens.
Most truckers also want to make sure that customer support is available whenever they need it. After all, trucking is a 24/7 business and you may not want to wait until the next business day to get help with issues that come up.
Comparing factoring rates can be tricky. Pricing will vary depending on a number of factors, so when shopping for the best freight factoring company, you need to accurately describe your business needs. Your rates may be affected by:
- Nonrecourse vs recourse factoring (the latter costs less)
- Your customer base and how quickly they typically pay invoices
- How much you’ll factor (volume)
- Additional fees
When evaluating factoring programs you’ll quickly learn that many invoice factoring companies will say they offer the best advance rates. But there may be hidden fees that add to the overall cost.
Here are some of the costs and terms you will likely encounter when you use truck factoring:
- Factoring rate: Factoring companies charge a fee for their services, which is typically a percentage of the invoice amount. This may be called the discount rate or factoring fee. Some firms advertise a flat rate while others may offer a variable rate that may depend on how long it takes to collect, and other factors.
- Advance rate: The amount you’ll get advanced will be a percentage of the invoice, and may be referred to as the advance rate. A typical range is 90—99% but it could lower for some higher risk situations.
- Reserve: The factoring company may hold a portion of the invoice amount in a reserve account to cover disputed amounts or nonpayment. The range here can be anywhere from 5% to 20% of the amount of the invoice.
- Fees: Examples of additional fees that may be charged include: application or signup fees, ACH fees, same-day payment fees, invoice upload fees, wire transfer fees, and termination fees.
- Interest charges: You typically won’t see the cost of factoring stated as an interest rate, but sometimes there will be an additional percentage charged for invoices that take longer to collect.
What happens if you decide to no longer factor with the company you’ve signed up for? Some factoring firms may require long-term contracts. If you want to get out sooner, you may have to pay early-termination or buyout fees. You may be able to avoid these fees by giving the proper amount of advance notice.
You’ll also want to understand how selective you can be when choosing which invoices to factor. These companies operate on volume, and it may not be worth it to them to factor the occasional invoice. For that reason, you may be required to meet minimum volume requirements.
Read the factoring agreement carefully to make sure you understand the terms offered and don’t be afraid to ask questions. There is a lot of competition for your type of business.
Some factors will buy out contracts with other factoring companies, but others will require you to get a letter of release from your current factoring company before you can switch.
Top Factoring Companies for Trucking
Here are some of the best factoring companies in the freight factoring industry, listed in alphabetical order.
AltLine the Southern Bank Company: Factor up to 95% of invoices. Trucking and transportation is one of the industries AltLine services.
eCapital: Freight factoring comes with a pre-approved line of credit. eCapital Connect is its business portal and app.
OTR Solutions: True non-recourse factoring, fleet factoring, backend office services and no credit restrictions.
Porter Freight Funding: Factoring for fleet owners, owner operators, and freight brokers. Offers both recourse and nonrecourse factoring with same-day funding.
RTS Financial: Trucking factoring, along with other tools like RTS Pro, its mobile app that provides quick access to fuel discounts, factoring services, broker credit ratings and trucking software.
TAFS: Recourse factoring, 1-hour night weekend advances, mobile app and client portal with detailed account information and free credit checks.
TBS: recourse and non-recourse factoring, no reserves or long term commitments. Use the TBS: Get Paid® app to preapprove loads and more.
TruckSmarter: 2% nonrecourse factoring with no minimums or long-term contracts. TruckSmarter Visa card offers 1% back.
Truckstop: Flat rate non-recourse factoring as low as 2.99%, full-service invoicing, and fuel service billing all managed through the Truckstop Go app.
All information about these factoring services has been gathered independently by Nav.
Alternatives to Factoring
If you don’t mind managing invoices, you may be able to use other types of small business loans or financing to improve cash flow. Just keep in mind that if you go this route, you’ll be collecting all the invoices, so you’ll need to put a system in place to manage accounts receivable. Accounting software can help, if it’s kept up to date, and you may be able to outsource account management if you prefer (at a cost).
Business Credit Cards
Business credit cards aren’t just a convenient way to pay for purchases. They also offer a credit line you can use to borrow when needed. Most credit cards offer a grace period which means you don’t incur interest if you pay your statement balance in full. That also means you can get up to two billing cycles to pay for your purchase without interest, depending on how you time your purchases.
Some business credit cards offer 0% intro APRs that can be used to finance purchases interest-free for several months. Generally, though, credit card rates can be high so you’ll want to avoid carrying a balance when possible.
Fuel cards are another funding option that can help with cash flow, as they give you more time to pay for those expenses. While many factoring companies offer fuel cards, you can also shop around for better options.
Business Line of Credit
A business line of credit offers short-term financing and is a popular source of working capital. Access the credit line when you need it, pay it back and borrow again. With good credit and solid revenues your business may qualify for a line of credit at a low rate, with costs comparable to, or even lower, than what you may get through factoring.
This article was originally written on May 5, 2023.