Freight factoring for small trucking companies: how it works and what it costs

Cash flow is one of the hardest parts of running a small trucking company. A load delivers today, but the broker or shipper may not pay for several weeks, while fuel, driver pay, insurance and truck payments are due now. Freight factoring is one way small trucking companies close that gap. It can help, and it has real costs. Here's how it works, what it costs and when it makes sense, including for dispatchers and brokers who work with factored carriers.

How freight factoring works

Factoring is the sale of your freight invoices to a factoring company at a discount.

1. Your truck delivers a load and you send the factoring company the rate confirmation, signed bill of lading and invoice.
2. The factoring company checks the paperwork and advances you most of the invoice amount, often within a day or two.
3. The factoring company collects the full amount from the broker or shipper on its normal payment terms.
4. When the customer pays, the factoring company releases any reserve it held back, minus its fees.

Most factoring companies also run credit checks on brokers and shippers before you haul for them, which can help you avoid customers with poor payment histories.

What factoring costs

Factoring isn't free money. Before you sign, understand every cost in the agreement:

• Factoring fee. A percentage of each invoice. It may be a flat rate or may rise the longer the customer takes to pay.
• Other fees. Some agreements add charges for same-day transfers, fuel advances, invoice processing, monthly minimums, or ending the contract early.
• Recourse vs. non-recourse. With recourse factoring, if the customer doesn't pay, you have to buy the invoice back or have the amount taken from future payments. Non-recourse factoring usually costs more, and the factoring company takes on the credit risk only in the situations the contract defines, often limited to a customer's documented financial inability to pay. Read exactly what is and isn't covered.
• Reserves. Many factoring companies hold back part of each invoice as a reserve until the customer pays. That money is yours, but you don't have it in hand right away.
• Contract terms. Look at the length of the contract, whether you must factor every invoice, notice periods for leaving, and any UCC lien the factoring company files on your receivables.

Compare these costs against your profit per load. If your margins are thin, factoring fees can take a large share of what's left.

When factoring helps cash flow

Factoring can make sense when:

• You're a new authority and don't have the cash to wait several weeks for payment.
• You want help checking broker and shipper credit before you book.
• You'd rather not spend your own time on invoicing and collections.
• Your business is growing and you need cash to cover fuel and payroll on more trucks.

It may not make sense when your customers already pay quickly, when your cash reserves can cover the wait, or when the fees would cut too deeply into thin margins. Some carriers factor only certain customers, or use factoring for the first months and then move away from it once their cash reserves build up.

Factoring and dispatchers

If you dispatch trucks for carriers, factoring affects you too. Many factoring companies will work with a dispatcher the carrier has authorized to submit load documents and invoices on its behalf, and some will pay the dispatch fee directly out of the funded load when the carrier's written agreement allows it. That can make billing simpler and more transparent for everyone, and it means the carrier isn't sending the dispatcher a separate payment.

A few points to keep in mind:

• Get the carrier's written authorization, and make sure your dispatch agreement spells out your fee and how it's paid.
• Remember that you're paid when the factoring company funds the load, which depends on clean paperwork and on the factoring company's terms.
• Some factoring companies offer referral programs. If you refer a carrier and receive anything for it, tell the carrier. Recommend a factoring company because its rates and service fit that carrier, not because of a referral payment.

Questions to ask a factoring company

• What is the fee, and does it change based on how long the customer takes to pay?
• Is the agreement recourse or non-recourse, and exactly when does recourse apply?
• How much is held in reserve, and when is it released?
• Are there monthly minimums, extra fees or early termination charges?
• Do I have to factor every invoice?
• How fast are funds sent, and what does same-day funding cost?

LFS helps small trucking companies with cash flow, billing and paperwork through its back office services. If you're still planning your company, see how to start a trucking company.