If you run a trucking company, you understand how fuel, insurance, repairs, and maintenance costs can eat through your revenue, negatively affecting cash flow. On average, fuel costs will set back a mid-sized trucking business $50,000-$70,000 yearly, while tire replacement pricing is between $1,000 and $4,000 per truck.
Some of these expenses can occur abruptly, such as a vehicle breakdown. Even though you will be providing your transportation service consistently, your customers may not pay you every time you make a delivery, causing cash shortages.
If you are looking for a way to bridge cash flow shortages, here’s all you need to know about factoring for trucking companies.
Freight factoring is a flexible source of funding that allows a trucking business or owner-operators to make deliveries and issue invoices and instead of enduring the typical payments delay, they can sell that invoice to a factoring company for a ready cash amount that’s slightly less than the invoice amount.
Just like other industries where large sums of money are involved, it’s not realistic for freight companies to expect full payment upon delivery. If anything, the industry standard between delivery and payments to trucking companies is 40 days.
Expectedly, most freight companies will offer a short-term grace period before requiring their customers to pay for the transportation services. For most, the waiting period is usually 30, 60, or 90 days.
Since delayed payments will cause cash flow issues, freight factoring steps in to seal the financial gaps. The transporter will sell their outstanding invoices or bills of lading to truck factoring companies in exchange for ready cash.
In the past, trucking companies relied on traditional funding options such as a credit card or business loan, but they offered punitive interest rates and unfriendly termination fees that chewed through profits. That’s why most settled on freight factoring services.
For some freight businesses, the quick payments can save their business as it helps settle freight bills without incurring debt. To others, the cost implication is a deal-breaker.
Any business owner would question the wisdom of selling their invoice for a lower fee instead of waiting for the customer to pay. Would it not be better to chase payments rather than share profits with other people? That sort of thinking ignores the reality of the trucking industry.
According to the American Transportation Research Institute 2020 report, the operational cost per mile of running a truck is $1.65 on average. Although the industry average for paying carriers is between 30-45 days, the reality is most clients pay late. Since truckers' salaries, fuel, and maintenance costs need settling sooner than the advertised 45 days, a trucking company can fall into cash flow issues.
Therefore, factoring invoices provides fast funding that helps you settle pressing bills and pass the responsibility of chasing payments to the factoring company. Additionally, the factoring company will run back-office support to handle credit history checks and billing.
The transportation industry is such a diverse field, so you may understandably have doubts if freight factoring covers your area of operations. You’d be pleased to know that most trucking companies, regardless of size or experience, can benefit from a trucking factoring company.
If you haul any type of freight, it’s almost certainly covered by truck factoring. Here are some of the kinds of transportation covered by freight factoring:
- Oil and gas
- Sand hauling
- General freight
- Refrigerate freight
This list is not comprehensive. If you still have doubts, contact Resolve today to determine if your company qualifies for freight factoring coverage.
Freight factoring institutions are third-party financial companies that buy your accounts receivable/invoice at a discount. After invoicing, agreeing on terms, and receiving payment, the invoice becomes their property; they are in charge of seeking payment.
It is an excellent option for a startup or small business as they can have a stable cash flow instead of relying on the unpredictability of promised future payments. Here is a breakdown of how a typical factoring company works:
- After delivering the goods, forward the details of your customer to the factoring services company, who will do a credit check to see if they qualify.
- If they do, send the invoice and all relevant paperwork to the factoring company, usually online or through an app.
- The factoring company will process the application, purchase that invoice, and release the money to your company.
- They will wait for the payment due date before collecting the amount from your customer.
The process is not set in stone as other companies may omit or take additional steps. How you present your application to the factoring companies will determine how they draft the terms of the agreement.
As it is a financial transaction, you should expect the factoring company to ask a few questions, and your answers will have a bearing on whether you qualify for the line of credit. You should expect questions about:
Your customer base: this is probably the most important as they seek to gauge the risk of investing in your business. They want to figure out if you are working with a single, multiple customers, or even numerous broker load boards. If you work with one customer exclusively, that is risky according to them.
Invoice volume: the more monthly invoices you generate, the better a business prospect you are to the factoring company, and the less percentage you will pay.
How much you need to keep the business operating: generally, they have an advance rate between 85%-95% of the invoice value to limit their risk. If you ask for a lower percentage, the factor will also offer low rates.
Your net-terms: if you offer extended periods before expected payments, that is not attractive to the factoring company. For instance, if an invoice value is $15,000 and you offer a 30 days repayment period while your competitor offers 60 days, that means the factoring company will get paid twice within the same period if they choose you over your competitor.
There are two types of factoring:
You are liable if your customer does not pay the invoice, which will include the cash advance plus any lost fees. That does not mean you must pay back in cash. You can agree to replace the unpaid invoice with a fresh one of sufficient value, or you can ask the factoring firm to debit reserves.
Contrary to popular belief, non-recourse factoring does not mean you won’t pay if the client does not settle the invoice amount. For the most part, non-recourse works similarly to full recourse factoring, including forms of payments in case of disputed invoices. The difference? In non-recourse factoring, you do not have to pay the factoring companies for a qualified reason. For instance, if an invoice falls due and the customer does not pay by a qualified reason of bankruptcy, you are not liable to repay the invoice amount.
In non-recourse factoring, the only allowable qualified reasons are closure or bankruptcy, which must occur during the factoring period, usually the first 90 days from buying the invoice.
That has not prevented factoring companies from offering expanded definitions of the qualified reason. For example, some may exempt you from paying a defaulted invoice due to closure without the client declaring insolvency.
Whatever the recourse type, the factoring agreement empowers factors to return disputed invoices, 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.
For slow or non-payments where the customer does not pay within the agreed period, how a factor approaches it depends on the factoring agreement. Some will absorb losses from clients that close shop without declaring bankruptcy, but most will not cover you if the non-paying or slow customer is 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.
Easy access to cash: freight factoring companies have less stringent qualification requirements, providing working capital to businesses that would otherwise be locked out of traditional lending facilities. Factoring companies do not strictly enforce provisions for creditworthiness like a conventional bank, as the viability of the factoring agreement is not contingent on the business owner’s credit score, rather the customers’ ability to pay in time.
Improves cash flow and provides money-saving opportunities: unlike the trucking company’s customers, freight factoring firms understand the importance of liquid cash to the daily running of a trucking company. Apart from improving cash flow to help trucking companies settle running costs, tracking factoring companies provide incentives such as fuel discount cards. They can channel part of the funds through fuel cards that may have other goodies like repairs discounts, fuel advances, and more fuel discounts.
Focus on end client or freight brokers credit: unlike other forms of financing that will require the applicant to have excellent credit scores and tidy business financial statements, the focus in this type of financial arrangement is the customer’s creditworthiness, not the trucking business. If the trucking firm has financial challenges, this is the perfect solution as they can access capital they would never get through conventional financing.
Fast solution: you never know when a financial emergency might strike, and most financing options won’t provide the urgent working capital needed. Freight factoring offers quick solutions since the typical approval and payment periods are lightning-fast compared to conventional bank loans.
It’s not all rosy with factoring firms as some of the factors may require that you maintain monthly minimums on payments and invoice volumes, or sign long-term contracts.
Despite what some factors say, you are still responsible for unpaid invoices, whatever the recourse factoring type. There are few isolated instances where you won’t be responsible for a client failing to pay.
Since the freight bill factoring company will collect the money from your client, it paints you in a bad picture, as customers will assume you have credit issues.
Some factoring firms may not handle your clients to the same high customer service standards, which may damage client relations.
The first thing you should consider is the loan terms and interest rates. You should also factor in the loan sizes the firm can provide. Ideally, you want to choose a factor that grants you access to a large pool of cash to allow your business to upscale, so a factoring firm offering a smaller amount is not a good fit.
Qualification requirements should play a part in the decision process. The perfect trucking factoring firm will not put unnecessary weight on your credit score, bank statements, or annual revenues. Although some factors will disqualify you for inadequate annual revenues or for not being in business long enough, you want a factor that judges you on the quality of your customer base.
You should also consider the type of factoring the company is offering. If your finances are not that shabby, you would be better off with recourse factoring as they offer better rates and higher advances on your invoices. For those who cannot secure capital from conventional means, non-recourse would be the way to go, but it has slightly worse rates, with lower loan upfront per invoice.
Finally, you have to consider how quickly the factor provides the funding. The trucking industry is fraught with emergencies, such as mechanical breakdowns, which means you have to be financially liquid at all times. It would help if your freight factoring firm releases funds quickly. Otherwise, your trucking business might grind to a halt because of a lack of spares or fuel.
One of the best ways to ensure you get a sweet deal out of a trucking factoring company, is to ensure you have creditworthy customers.
You may have excellent credit scores, but factors get jittery when you present an invoice bearing a company with questionable finances. That is a recipe for hiked factoring rates, especially if you go the non-recourse direction.
One of the best factoring options is not factoring at all. Resolve is actually considered as the ‘modern version of factoring’. Check out our other article; 8 Reasons why Resolve is Better Than Invoice Factoring.
Resolve is a complete net terms management solution that will reduce your risk and improve cash flow. The solution will handle credit checking, credit decisions, and credit line management, helping you decide which customers are good for 30, 60, or 90 days net terms. Resolve will display all this in a nifty dashboard and they have a payment portal for your customers that accepts checks, ACH, or credit cards.
That’s not even the best part. Resolve acts as your credit team on tap, and won’t ruin your relationship with your customers. Our advance payments are completed in one day, we check your client’s creditworthiness and advance up to 90% of the value of the invoice within 1 day of customer approval. Recourse offers non-recourse financing, which means we chase the payments and assume the risk of non-payment.
Most factoring companies will charge full factoring, recourse factoring, accounts receivable factoring, and other forms of fees that will typically eat up 20-40% of the invoice amount. Resolve only charges a flat rate, with no hidden fees.
Further, Resolve allows you to choose how much advance you need on an invoice, charging a fixed rate on the advanced amount. Other companies will charge rates on the entire invoice amount.
Resolve is one of the best alternatives to factoring companies, as you don’t need accounting staff to take care of the net terms program.
The true cost of factoring is one of the sticking points, with some insisting the high interest rates are not business-friendly, while others think trucking factoring is a lifesaver. Like most financing options, the rates will depend on your financial standing.
Most freight factoring companies will consider your credit score, how long the business has been in operation, and see how they align with their company policies. Some factors may even offer rates as low as 0.00% to 0.5% to freight companies with impeccable credit.
Your choice of factoring type will determine the cost of the agreement. Non-recourse will cost you more than full recourse factoring, as a full recourse factor would generally charge a flat fee or combined with a percentage rate, while non-recourse will attract a flat commission rate, interest rate on the borrowed money, and a surcharge on riskier receivables.
The length of a normal loan term will determine the rate the lender will charge you, and it’s no different with freight factoring. Typically, an invoice charged weekly or monthly will have a lower percentage rate than long-term financing.
Since a freight factoring firm has to consider many aspects of a business, they will not publish factoring rates as each client has its unique set of circumstances. They will instead encourage you to contact them so they can get more details before determining your financial needs.
In short, if you have a credit score of 560 or more, some may offer you factoring rates as low as 0.00%, but if your business credentials are a mess, that figure can shoot up to 24.00%.