October 27, 2022

The Ultimate Guide to Freight Factoring

If you’re in the transportation industry, there’s a good chance you’ve considered freight factoring as a means of improving your company’s financial circumstances. However, there’s a big difference between basic knowledge of freight factoring and using it to take your company to the next level.
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The Ultimate Guide to Freight Factoring

If you’re in the transportation industry, there’s a good chance you’ve considered freight factoring as a means of improving your company’s financial circumstances. However, there’s a big difference between basic knowledge of freight factoring and using it to take your company to the next level. 

In our ultimate guide to freight factoring, we provide all the information you need to make a more informed decision about freight factoring and its potential impact on your trucking business. 

What is Freight Factoring?

Freight factoring, also known as transportation factoring, is an efficient way to get paid on the loads you run today instead of waiting for 30+ days to receive payment. With fast and reliable access to cashflow, it’s easier to keep your business moving forward between payouts. 

Without freight factoring, you’re at the mercy of slow-paying clients. Consider this: the trucking industry standard is 40 to 50 days for processing full payouts. If you can’t wait this long, freight factoring is your best option. 

Before freight factoring gained popularity, many trucking companies were stuck with two options: relying on a bank loan or waiting for funds to reach their account.

While a bank loan may give access to funds sooner than waiting on payment from customers, the interest charges become a huge drawback for many businesses. 

Waiting 30 days or more to receive payment means you’ll be missing out on crucial opportunities for growth. This also makes it more difficult to pay for expenses such as truck repairs, fuel, insurance, and payroll.

First-hand experience is the best way to understand the benefits of freight factoring. Once you have tried freight factoring you may realize that you can’t live without it.  

A lone truck driving on a road

How Does Freight Factoring Work?

As noted above, getting paid quickly in the transportation industry is not standard. It’s not out of the question to wait several months to receive payment in full. Invoice factoring allows you to submit invoices for same-day processing, giving you immediate access to funds. 

Freight factoring works by both benefiting the trucking company and the factoring company. The trucking company is paid immediately, as opposed to waiting an indefinite period of time. Conversely, freight factoring companies receive a fee for “fronting” the money to the freight company. 

Every good partnership is mutually beneficial, and that’s exactly what you get with freight factoring. Your business gains access to immediate funds for accounts receivable while the invoice factoring company receives a service fee.

The Difference Between Non-recourse and Recourse Freight Factoring

There are many important factors to consider when choosing a factoring company, but one of the most important comes down to choosing between non-recourse or recourse freight factoring. There’s a big difference between the two, so making the right choice is critical to your short and long-term success. 

Non-recourse factoring means that the factoring company will not collect from you if your customer fails to pay them back. While this sounds like a benefit to you, it’s often nothing more than how the offer is presented. 

Simply put, non-recourse factoring is true in only the rarest of cases. For example, if a customer files for bankruptcy between the time you submit an invoice and when they’re due to pay the factoring company. 

Factoring companies don’t stay in business by offering non-recourse arrangements. Every company will recourse you if your customer neglects to pay or pays them later than your agreed-upon terms. 

Non-recourse freight factoring is too big of a risk for the factoring company. They must be able to collect from you if your customer fails to pay for any reason. 

Tip: read the fine print of your factoring agreement to ensure that you understand what you’re agreeing to. 

Benefits of Factoring for Trucking Businesses

There’s no shortage of benefits of factoring for trucking businesses, and that’s why a growing number of them are going down this path. Before you decide in favor of freight factoring, it’s important to understand the benefits and the potential impact on your company.

1. Cashflow

One of the biggest challenges trucking companies face is a lack of cashflow. They do the work, as required by their customer, but don’t get paid for 30 days or more. This lack of cashflow makes it difficult to stay on top of expenses. 

Through freight factoring, cashflow improves to ensure that you never slip behind on expenses and that you’re in a position to grow your company. 

2. Save time and money

When compared to more traditional forms of financing, such as a bank loan, freight factoring is much more cost-effective and time-efficient. For example, you can submit an invoice today and receive funds by tomorrow. 

With a loan, the application and approval process can take several weeks or longer. Loans also charge interest and other additional fees. With factoring, there is no interest involved, you simply pay one fee for your advance.

3. Improved customer relations

Collecting from customers is easier said than done. Not only is it time-consuming, but it can be awkward. And if your customer is delayed in paying you, it puts you in the difficult spot of attempting to collect. 

With freight factoring, your invoice factoring company manages the collections process allowing you to focus on your business needs.

A freight truck completing a delivery

What to Look For in a Freight Factoring Company

It’s one thing to say that you’re interested in freight factoring, but another thing entirely to find a company that has the same vision as you. Knowing what to look for in a freight factoring company allows you to develop a solid relationship with a partner that’s interested in your success.

Here are three things to look for in a freight factoring company:

1. Transparent fee structure

You need to know where your money is at every step of the process. You also need to know how much money you’ll receive upfront for your invoices. A factoring company with a  transparent fee structure allows you to understand exactly what you’re getting into so there are no questions surrounding your hard-earned funds.

2. 24/7 monitoring access

The more invoices you submit to your freight factoring company the more difficult it becomes to track them. With 24/7 monitoring access, you’ll never have questions or concerns about where your money is. Look for a company that has an easy-to-access portal so you can track everything from collection notes to purchase reports to statements.

3. A reputation for exceptional service

Just the same as any industry, some freight factoring companies have a better reputation than others. You don’t want to take a risk. Read reviews of every freight factoring company you’re considering. Also, contact the companies on your shortlist to ask questions. 

How Invoice Factoring Companies Calculate Risk

It goes without saying that freight factoring companies are selective in the companies that they work with. They’re not in the business of giving out free money or taking unnecessary risks. 

As a potential customer of a freight factoring company, you want to understand how they calculate risk. This allows you to present your business in the best light possible.

Here are two ways that invoice factoring companies calculate the risk of working with a freight business:

1. Creditworthiness of your customers

Yes, factoring companies want to align themselves with customers who have a strong credit history. However, what they’re really interested in is the creditworthiness of your clients. These are the companies that actually pay the invoices they’re trying to collect. 

Do your customers have a history of honoring their debts? Do they pay in full and on time? If so, factoring companies will see you as a lower-risk customer—and that’s a good thing. 

2. Profit margins

While not a hard and fast rule, factoring typically works best when a company has profit margins of at least 10 to 15 percent. Without this, there’s more risk for the factoring company. Not to mention the fact that it won’t make as much financial sense for your business.

The best way to understand how an invoice factoring company calculates risk is by asking them for additional information. You can then take steps to improve in key areas.

The Freight Factoring Application Process

The best freight factoring companies are the ones that make it easy to apply. You don’t want to jump through hoops to be accepted as a customer. This reduces the chance that you’ll actually follow through, and that means less business for the factoring company. 

The first step in the factoring application process is collecting and sharing basic information about your business, such as its legal name and revenue. 

From there, you’ll provide details about your invoices. Most importantly, payment terms and periods. Don’t hold anything back. The more information you supply the easier it is for a factoring company to determine if you’re a good fit.

A factoring company will also want access to recent bank statements

With all this in hand, you can confidently complete a formal application. The factoring company will review it, ask you for any additional information that’s required, and provide you with an approval or denial. 

The final step in the application process is deciding if you’ll sign on with the factoring company. 

A transportation company owner happy with freight factoring services

How Does My Freight Company Qualify?

Every freight factoring company has its own set of eligibility requirements, which generally include the following:

  • B2B service provider
  • Minimum annual revenue (10K-10M)
  • Clear audit trail
  • Creditworthy debtors
  • No liens on accounts receivable
  • No pre-billing

These aren’t the only factors that come into play, but they’re critical in receiving approval for invoice factoring. 

By asking a factoring company for a list of qualifications upfront, you can take steps to improve the likelihood of meeting or exceeding them in the near future. 

Freight Factoring Frequently Asked Questions (FAQs)

It’s natural to have questions about freight factoring, especially if you’re new to the process. Fortunately, when you ask and answer the right questions, you can clear the air to move forward with greater confidence. 

Here’s a list of frequently asked questions to address:

  • Does the freight factoring company contact your customers directly?
  • Do freight factoring companies provide services in addition to invoice factoring?
  • How much does factoring cost? Are fees negotiable?
  • Do you have to factor all of your invoices?
  • What happens if a customer fails to pay the freight factoring company?
  • How long does it take to secure funding? Is same-day funding available?

While you can attempt to answer these questions on your own, it's always best to connect with a reputable freight factoring company for additional information and guidance. This way you know you’re relying on accurate information to make your final decision.

Choose REV Capital for All Your Freight Factoring Needs

As a freight company, you’ll find many factoring companies that are willing to do business with you. But that doesn’t mean they’re all a good fit. You want to choose the best partner for your business. REV Capital is the solution.

At REV Capital, we have the experience and knowledge necessary to provide you with high-quality service as you grow your trucking company. Apply online today to kick off the process. From there, a Client Relationship Manager will contact you to learn more about your business and goals and to discuss the next steps.