Understanding Factoring: A Lifeline for Truckers

In the trucking industry, maintaining steady cash flow can be a constant challenge. Factoring, a financial service designed to expedite the billing cycle, offers truckers a reliable solution. This guide explains factoring in trucking, illustrating how it can become a vital part of your business strategy. 

How Factoring Works 

The value factoring is designed to provide to trucking companies is improved cash flow, but the process itself is not extraordinarily different from standard business operations. Once you complete a drop, you submit paperwork, including proof of delivery to your factoring company instead of invoicing your customer or broker. Once the factoring company verifies the load, you’ll typically be paid within 24 hours. Your broker or the shipper pays the factoring company according to terms.   

Benefits of Factoring for Truckers 

Factoring extends several advantages to trucking companies, big and small: 

• Improved Cash Flow: Receive payment in days, not weeks or months later. 
• Reduction in Administrative Burden: The factoring company handles the collection process, freeing you to focus on core business activities. 
• Credit Qualification: Freight factoring companies also perform credit checks on brokers and fleets, because they are responsible for collecting the AR. This both frees you up to handle your core business activities and also helps to ensure that you are working with reputable businesses.  
• Risk Mitigation: If leveraging a non-recourse factoring program (see recourse vs. non-recourse factoring), the factoring company takes on the risk of a customer declaring bankruptcy or going out of business. This is why they have a vested interest in conducting credit qualifications, but it also relieves a huge risk from your trucking business. 
• Reliable Business Forecasting: When the risk of non-payment is removed from the equation and you have a schedule on which you know you will be paid for work completed, you have better insight into your cash flow. 

Choosing the Right Factoring Service 

Selecting the appropriate factoring service is crucial. Consider the following when making your choice: 

• Reputation and Reliability: Choose a company known for its professionalism and solid track record in the trucking industry. Check Google reviews, ask your peers, colleagues and networking groups for their feedback. 
• Fee Structure: Understand all fees involved, including any additional charges for services like  
  • credit checks 
  • fund transfers  
  • initial set up fees 
  • If there is a minimum volume expectation in the agreement, what is the penalty for not hitting that threshold?  
• Contract Terms:  
  • How fast will your factoring company remit payment? And what is required for that payment?  
  • Is your factoring company is open to spot factoring or do they require a contract factoring commitment.  
  • Do they have a minimum volume requirement, term-commitment?  
  • Do they require a factoring reserve at any point, and what is that reserve?  
  • Are they offering recourse or non-recourse factoring?  

Make sure the terms of the contract provide the right benefit to your business beyond immediate cash flow. The following sections will talk you through some of these terms to better understand their benefits and short-falls. 

• Borrowing Capacity: What is the maximum value you can borrow against your outstanding invoices? 

What is a Factoring Reserve? 

Some factoring companies will pay a portion of the invoice (80-95% of the value) upon all the trucking company’s paperwork being submitted and then pay the balance only after they have collected from the shipper.  

This can be standard in your agreement with a factoring company or it may apply to invoices over a certain value.  It may also be based on an AR threshold for the month. Once submitted invoices within the month surpasses a certain value, a factoring reserve may take effect.  This is one method factoring companies may use to protect their own risk and cash flow. Make sure you review your factoring agreement carefully to understand if / when a factoring reserve may be applied. 

What is Recourse Factoring vs. Non-Recourse Factoring? 

In Non-Recourse Factoring, if your customer declares bankruptcy or goes out of business after your load has been verified and before the invoice comes do, the factoring company cannot come back to the trucking company for those funds.  If an operational customer fails to pay the factoring company within terms, the factoring company is still likely to turn to the trucking company for assistance with collecting funds due.  

In a recourse program, the freight factoring company maintains the right to collect from the trucking company if the customer does not pay the invoice within terms.  

What is Spot Factoring vs. Contract Factoring? 

When you sign with a factoring company, they may have a requirement that you run all of your invoices through your factoring program. This is called contract factoring. The alternative is spot factoring, which allows you to pick and choose which invoices you decide to factor. Spot factoring programs may still require a minimum volume commitment from you, but also provides you the option to continue collecting from your fast-paying regular shippers directly.  

Common Misconceptions About Factoring 

Despite its benefits, some misconceptions about factoring persist: 

• "It’s too expensive": While fees are involved, the immediate cash flow and reduction in credit risk often outweigh these costs. Factoring rates are typically between 2-5% of the invoice value. Comparing this amount to your average cost of capital to float the cost of the load yourself for 30-90 days will help you assess the value of factoring to your business.
• "Only struggling companies factor their invoices": Factoring is used by businesses of all sizes to manage cash flow more effectively, not just those in financial distress and not just trucking companies. Industry experts estimate that as much as 80% of loads in the current market are factored.

Multi Service Fuel Card and Factoring Services 

Multi Service Fuel Card is not just a leader in fuel payment solutions; we also have alliances with several respected factoring companies in the industry. If you are exploring factoring options to boost your business’s cash flow, our account management team is available to help. You can ask one of our representatives for an introduction to a trusted factoring alliance, ensuring you get the support that best fits your financial needs. 

Factoring is more than just a financial service; it's a strategic tool that can help stabilize your trucking business by improving cash flow and reducing administrative overhead. By understanding and utilizing factoring, you can keep your fleet moving smoothly and your business growing.