The Ultimate Guide on Factoring for Trucking Companies

Updated on March 24, 2023

If you are looking for a way to bridge cash flow shortages, and you are considering invoice factoring, financing, or another alternative, here’s all you need to know about factoring, specifically for trucking companies.

If you run a trucking company, you will know how fuel, insurance, repairs, and maintenance costs can eat through your cash, negatively affecting your cash flow. On average, fuel costs will set back a mid-sized trucking business by about $50,000 yearly, while tire replacement pricing is between $1,000 and $4,000 per truck. Some of these expenses can occur abruptly, such as vehicle breakdown costs or fuel expenses.

Even though you may be transporting cargo consistently and the revenue is coming in, your customers may not pay you upon delivery, creating a cash shortage for you. You essentially end up financing your customer’s invoice!

What is freight factoring?

Freight factoring is a flexible source of funding that allows a trucking business or owner-operators to make deliveries and issue invoices as usual. Instead of sending a payment reminder or needing to deal with the usual payment delay, trucking businesses can sell invoice to a factoring company for a specific amount of cash, slightly less than the invoice amount. The freight factoring company is the party who will then wait for the actual payment from the customer.

As with most industries where large sums of money are involved, it’s not realistic for freight companies to expect full payment upon completion of delivery. If anything, the industry standard between delivery and payments to trucking companies is 40 days or more.

Most freight companies will offer a short-term grace period before requiring their customers to pay for transportation services. For most, the waiting period is usually 30, 60, or 90 days. This waiting period is also known as offering “net terms” or “payment terms”.

Since deferred payments will always cause cash flow issues, freight factoring steps in to cover the gaps as the trucking company is waiting on their customer to issue payment. You can then understand why a transporter would want to sell their outstanding invoices to truck factoring companies in exchange for immediate cash upfront. Trucking companies no longer have to wait for the payment term period to elapse before receiving their payment.

Historically, trucking companies relied on traditional funding options and financing options such as credit cards or business loans. But these options offered poor interest rates, and brandished termination fees that chewed through profits. That’s why most companies settle on using freight factoring services.

For some freight businesses and companies, immediate cash payments can save their business or grow their business. For instance, Elston Materials was able to elevate its business and grow revenues and margins by using a better factoring alternative like Resolve. The upfront cash helps companies cover freight bills without needing to incur debt themselves. To others, the potential cost implication of using a freight factoring company might be a turn-off.

Why a company would need freight factoring services

Some business owners question the wisdom of selling their invoice for a lower fee instead of simply waiting for the customer to pay. Surely, wouldn’t it be better to chase payments rather than share your margins with another company? This type of thinking ignores the current reality of the trucking industry.

According to an American Transportation Research Institute 2022 report, the operational cost per mile of running a truck is $1.855 on average, an increase of 12.7 percent compared to 2021. Even though the industry average for paying carriers is between 30-45 days, the reality is most clients pay late. Since a trucker’s payroll, fuel, and maintenance costs require payments more frequently than 45 days, you can see how a trucking company could fall into cash flow issues.

Factoring companies thus provide an option for fast funding that helps companies pay pressing bills, and as an extra benefit, pass the responsibility of chasing payments and sending payment reminders to the factor. Additionally, the factoring company will most likely provide additional-office support as some of them also handle B2B credit management services like credit history checks, credit check automation, and invoicing.

Types of freight companies covered by factoring

The transportation industry is a diverse field and some people do not know if freight factoring covers their field of operations. You’ll be pleased to know that most trucking companies, regardless of size and years in business can benefit from using a trucking factoring company!

As long as your company is hauling any type of freight (even shippers) your company can most likely be covered by freight factoring. Here are some of the transporting branches covered by trucking factoring:

• Tanker
• Hazmat
• Oil and gas
• Sand hauling
• Liquids
• General freight
• Refrigerated freight

This is a short list and is not fully comprehensive. If you have doubts, connect with a factoring company or a factoring alternative company (like Resolve) to find out if your company can offer freight factoring coverage.

How freight bills factoring companies work

Freight factoring companies are considered third-party financial companies that purchase your accounts receivable invoice at a discount. After invoicing your customer, agreeing on the terms, and receiving payment, the invoice becomes their property so they will be in charge of sending payment reminders and collecting payment from the customer.

Factoring is a great option for a startup or small business as you can have a more predictable and stable cash flow stream, instead of relying on the unpredictability of promised future payments. Here is a breakdown of how a typical factoring company works:

• After delivery of the goods, you forward the details of your customer to the factoring services company, who will run a credit check to see if your buyer qualifies.
• If your buyer does qualify, you send the invoice and all relevant paperwork to the factoring company, usually via an online platform or an app.
• The factoring company will then process your application, purchase your invoice, and release the funds immediately to your company.
• After, they will wait for the payment due date on the invoice before sending payment reminders, and ultimately collecting the payment from your customer.

This factoring process is not set in stone. Some factoring companies may omit certain steps or add additional steps.

What to expect with a freight factoring service

When you sell your invoice to the factoring company, this is considered a financial transaction. Your answer will have a bearing on whether you qualify for the service and how they frame their factoring agreement with you. These are the types of questions you should expect:

Customer base:This is the most important as they want to understand how risky it is to invest in your business by understanding who you work with. They want to figure out if you are working with a single buyer or have multiple customers. They even want to know if you have multiple broker load boards. If you work exclusively with one customer, they consider this risky.

Invoice volume: The more monthly invoices you generate, the better you appear! To them, you will be seen as a strong business, and this may even result in a lower percentage fee.

How much cash you need to keep the business operating: Some factoring companies have a cash advance rate between 85%-90% of the invoice face value. They usually don’t provide 100% to limit their risk. If you ask for a lower percentage, the factor will typically also offer low rates.

Payment terms: If you offer long payment terms before invoices are due, that will not be very attractive to the factoring company. For instance, if your invoice value is $15,000 and you offer 60-day terms, that means the factoring company won’t get paid for two full months.

Which is best for you: Recourse or non-recourse factoring?

There are two types of factoring:

Full recourse factoring: You are liable for the cash if your customer does not pay the invoice. If your customer does not end up paying the factoring company. The amount you repay to the factor will include the original cash advance plus any lost fees. However, this does not mean you must pay this back in cash. You can also agree to replace the unpaid invoice with a new invoice of sufficient value. You can ask the factoring firm to debit your account.

Non-recourse factoring: Contrary to popular belief, non-recourse factoring does not mean you aren’t on the hook. For the most part, non-recourse works in the same way as full recourse factoring, including forms of payments in the event of disputed invoices. However, in non-recourse factoring, you do not have to pay the factoring companies if there is a qualified reason. For instance, if an invoice falls due and the customer does not pay because the qualified reason is bankruptcy, you are not liable to repay the invoice amount.

Note, in non-recourse factoring, the only allowable qualified reasons are closure or bankruptcy. The closure or bankruptcy must occur during the factoring period, which is usually the first 90 days from the time of purchasing the invoice.

A lot of factoring companies will also offer expanded definitions of reasons for qualification. For example, some companies may exempt you from paying a defaulted invoice due to closure without the client declaring insolvency. Remember to check the terms of services with the factoring company you choose to work with.

Pros and cons of recourse and non-recourse invoice factoring

Whatever the type of recourse you have, most factoring agreements will empower the factor to return the disputed invoice, whether the customer makes a reasonable dispute or not. They keep a close eye on their non-recourse lines, and will likely reduce or cancel it at the first sign of lowered credit.

But what about super slow or complete non-payment of invoices? If the customer takes beyond the payment term on the invoice, how you approach it depends on your factoring agreement. Some companies will absorb losses from clients that close shop without declaring bankruptcy. However, most factoring companies will not cover you in case of non-paying or slow customers who are not bankrupt.

Since non-recourse carries some risk over full recourse, the non-recourse factoring lines will carry slightly higher rates. Further, they will have lower credit limits, as the factor will look to lower risk as much as possible, and as stipulated by the credit insurance company.

Benefits of truck factoring

Easy access to cash: The best benefit of freight factoring is fast access to cash flow by selling your receivables. They offer less stringent requirements for qualifications and provide working capital to businesses that would otherwise be locked out of traditional lending facilities. Factoring companies do not strictly enforce requirements for creditworthiness like a conventional bank, as the viability of the factoring agreement is not contingent on the business owner’s credit score, but rather on the customers’ ability to pay on time.

Improves cash flow and provides money-saving opportunities: Unlike the trucking company’s customers, freight factoring firms understand the importance of liquid cash. Cash provides the fuel to operate a trucking company’s business! Apart from improving cash flow to help trucking companies manage running costs, some factoring companies may even provide certain incentives such as fuel discount cards. Some channel part of the funds through fuel cards that may provide other essential services like repairs discounts, fuel advances, and even more fuel discounts.

Focus on end-client or freight brokers’ credit: Other forms of invoice financing require the applicant to have great credit scores and amazing Experian business credit reports. However in this case, the focus is on the creditworthiness of the customer, not the trucking business. If the trucking firm has financial challenges, then factoring is a perfect solution as they can access the working capital that they would likely never receive through conventional financing means.

Fast solution: You never know when a financial emergency might strike and the reality is, most financing options won’t provide the urgent working capital needed. Freight factoring offers a fast solution since the typical approval and payment periods are lightning-fast compared to conventional bank business loans.

Cons of freight factoring trucking companies

Everything is not always rosy with factoring firms! Keep these things in mind.

• Some factors may require that you send a specific volume of invoices as a monthly minimum or sign long-term contracts with them.
• Despite what some of the factors may stipulate, you are ultimately still responsible for unpaid invoices regardless of the recourse factoring type. There are only very isolated exceptions where you wouldn’t be responsible for a customer who has failed to pay.
• Since the freight bill factoring company is ultimately managing your receivables from your customer, this could damage your reputation as customers might assume you have credit issues.
• Some factoring firms may not handle your clients according to your standards of customer service, which may damage client relations. In fact, some of them might be very aggressive! Just ask Elston Materials.

More cons: The cost of a truck factoring program

We cannot discuss the cons without discussing the rates involved. While the rates are not necessarily business-friendly, some may think that trucking factoring companies are still a life saver. Like most financing options, the rates will depend on your financial health and standing.

• When determining what rate you will pay, most freight factoring companies will consider your credit score, how long your business has been in operation, how many invoices you submit, and of course, the creditworthiness of your customers. According to Advanced Commercial Capital, truck factoring rates typically fall “between 1% and 5% of the invoice amount.”
• Your choice of factoring type will also determine the cost of the agreement. Non-recourse costs more than full recourse factoring.
• The length of a term loan also determines the rate that a traditional lender will charge you. It’s no different with freight factoring. Typically, an invoice charged on a weekly or monthly basis will have a lower percentage rate than long-term financing.
• Since a freight factoring firm has to consider so many aspects of a business, they usually do not publish factoring rates externally. Each company has a unique set of circumstances. You’ll need to contact them directly to get more details to determine your needs.

How to choose the best freight bill factoring company

If you want to de-risk, here are a few things to consider:

• The first thing to consider are the terms and interest rates. You should also factor in the amount of the “loan” sizes that the factoring firm is able to provide you. Ideally, you want to choose a factor that grants you access to a large pool of cash which will allow your business to grow. A factoring firm that offers a smaller amount than you need is likely not a good fit.
• Qualification requirements should play a part in your decision process. An ideal trucking factoring firm for you should not put unnecessary weight on your credit score, bank statements, or annual revenues. Although some factors may disqualify you for low annual revenues or the length of time you have been in business, you want a factor that judges you on the quality of your customer base.
• Also, consider the type of factoring the company is offering. Depending on your situation, you may need to lean towards recourse or non-recourse factoring. If your finances are strong and you simply need an injection of cash to resolve a challenge, you may be better off with recourse factoring. This would likely offer you better rates and higher advances on your invoices. For those who cannot secure capital from conventional means, non-recourse would likely be a way to lean, although this may have slightly worse rates and lower loan advances upfront.
• Finally, consider how quickly the factor provides the funding and cash advance. The trucking industry is fraught with emergencies, such as vehicle breakdowns. That means you need to be consistently liquid. Your freight factoring firm should be in a position to release funds to you quickly. Otherwise, you put your trucking business at a risk as it might grind to a halt because of a lack of spares or fuel.

The best alternative to a trucking factoring company

One way to ensure you get the best deal from a trucking factoring company (especially when you’re making the first application) is ensuring you have creditworthy customers.

Your buyers may have great credit scores, but things may look questionable when you present an invoice to your factor from a company that has questionable financial statements. That is a recipe for increased factoring rates, especially if with non-recourse factoring. So, how do you check whether a customer is creditworthy?

Assessing creditworthiness is hard. After all, you’re not a lending expert!

Here’s where Resolve comes in. Many Resolve is one of the best factoring companies, as you don’t need accounting staff to take care of net terms program.

Resolve (better known as the best modern alternative to factoring ) has a smart credit engine that offers reliable, fast, sophisticated, and free credit checks. This is known as the “quiet credit check” since your buyer is not required to fill out a lengthy, manual application form! Not even credit card details are required! Once Resolve runs their fast business credit check on your buyer, they will even provide a recommendation for the credit line to provide them, including details of their decision. With Resolve, you don’t even need to learn how to read an Experian business credit report! You can trust their “credit team on tap” as they are experts in B2B credit management.

But it doesn’t end with just a credit check. Resolve is actually a platform where you can offer net terms online. This end-to-end platform will not only reduce your credit risk but also improve your cash flow, and even improve your B2B customer experience.

Essentially, it’s everything you wanted in factoring (faster payment on your invoices) plus additional benefits that will help you grow your business. Resolve will handle your credit checking, credit decisions, and credit line management, all while helping you decide whether to offer 30, 60, or 90 day (or zero) payment terms to your buyers.

Here’s how it works:

• To access Resolve’s day funding program, Resolve checks your customer’s creditworthiness, as outlined above. After determining the customer is indeed good for credit, they will determine how much can be advanced to you.
• Like a factoring company, Resolve advances cash! They can advance up to 90% of each invoice value, within a business day of your being approved. Resolve is similar to non-recourse factoring. They chase your payments on your outstanding AR invoices and actually assume the full risk of non-payment (so in this way, they really are better than factoring!)
• What about the fees? While some factoring companies charge you the full rate on the entire invoice, Resolve doesn’t do this. Instead, Resolve allows you to choose how much advance you need on an invoice. Perhaps you don’t need the full 90% advance. Perhaps you only need 50%. Resolve will charge a fixed fee on the amount of the advance, depending on how much was advanced (50%, 75%, or 90%).
• Also, a lot of factoring companies (recourse, non-recourse) and accounts receivable factoring companies can eat up 20-40% of the invoice amount! Resolve only charges a flat fee, with no hidden fees.
• On top of all of this, your buyers can also process their payments through Resolve (something they can’t do with a traditional factoring company). Resolve will give your buyers a modern, digital payment portal that accepts payments in the form of wire transfers, ACH, credit cards, and even manual checks!

The bottom line: Factoring for trucking companies

We hope this has provided you with a comprehensive overview of freight factoring, a popular financial transaction where companies sell their accounts receivable invoices to factoring companies at a discount. We’ve discussed the benefits of freight factoring (quick access to cash) but also noted the cons (monthly minimums on payments and invoice volumes, and the potential damage to your client relationships).

If you’re interested in factoring as a financing option... but something doesn’t quite click. Check out a popular factoring alternative, Resolve. They offer everything that factoring offers (cash advances) plus more: credit checks, credit decisioning, invoicing, accounts receivables collections, and payment processing. Learn more about their free trial for business credit checks and see if it’s a fit for you.