February 24, 2023
If you’re beginning to research freight factoring, you’re probably a business owner or bookkeeper who is interested in keeping your business’s cash flow running smoothly. Maybe you’ve just started a brand-new trucking company and you’re looking for ways to manage the large upfront costs you have like fuel and insurance. Or maybe you’ve been in the business for a while now, but you’d like to get some time back from all those collections calls to customers.
So, what is freight factoring, and how can it help trucking companies like yours?
We’ll cover it all:
- What is freight factoring? A Definition
- How does freight factoring work?
- What are the benefits of freight factoring?
- Is freight factoring debt?
- 2 real-life examples of freight factoring
- Is freight factoring right for you?
What is Freight Factoring? A Definition
Freight factoring, sometimes known as invoice factoring or trucking factoring, is where a factoring company pays your invoice for hauling a load within 24 hours (minus a small fee for their services), then bills your customer and takes on the waiting period to get paid in 30, 60, or 90 days. This gives you access to immediate cash to keep your business running smoothly, while also saving you time by taking back-office and collections work off your plate.
How Does Freight Factoring Work?
While the process can look slightly different depending on which factoring company you choose to work with and your unique business model, it generally looks like this:
- You accept a load from your customer and deliver it like you normally would.
- Instead of creating an invoice and billing your customer, you submit your rate confirmation with the signed BOL and any other pertinent documents (like lumper receipts) to your factoring company.
- You will get paid right away by your factoring company (minus a small fee for their services) usually via Wire or ACH.
- Your factoring company then bills your customer and waits the 30, 60, or 90 days to be paid.
- Rinse and repeat for boosted cash flow.
What Are the Benefits of Freight Factoring?
The primary benefit of freight factoring is that it helps businesses generate more liquidity for investments in their business, but there are a host of other benefits to using this tool:
We know, this one is obvious. Freight factoring can help you manage a wide variety of credit terms imposed by your customers. When you factor an invoice, the immediate cash can allow you to pay bills, expand your business, and add predictability to your finances.
Easy to Qualify
Unlike a traditional bank loan, a factoring company doesn’t look at your credit score to determine if you qualify. Instead, they focus on the creditworthiness of your customers since the risk for the factoring company lies in whether your customers will pay their invoices.
Flexibility – Funding on Your Terms
You can choose which invoices to factor. For example, if you have a customer who pays you promptly, you don’t have to factor those invoices. Or if you haul freight for an industry that is seasonal, like produce or Christmas trees, freight factoring can get you through your slow periods.
Back-Office & Collections Support
With a factoring company managing all your paperwork, billing, and collections work, you are able to focus on running your business.
Remember when we mentioned that a factoring company focuses on the creditworthiness of your customers? In order to protect you from the risk that your customer won’t pay their invoice, your factoring company will run credit checks on your behalf to make sure they are reliable before you start hauling loads for them.
When you partner with an established factoring company, their good reputation in the shipping community can directly benefit your company. A good factoring company will provide your customers with the same excellent customer service they give to you.
Is Freight Factoring Debt?
Unlike traditional bank loans, freight factoring is not a debt. The reason why is that you are selling your accounts receivable (which is an asset). It’s your money, your customer just hasn’t paid you yet.
Additionally, freight factoring generally doesn’t prevent you from securing financing alongside it. Since freight factoring doesn’t increase your debt ratio – which is something banks look at when considering a loan – it won’t stop you from receiving a bank loan if you choose to get one. Further, when you use freight factoring to improve your cash flow, you generally see improved credit because you are able to pay your bills on time.
2 Real-Life Examples of Freight Factoring
To see freight factoring in action, here are two real examples of trucking companies that partnered with OpenRoad Financial Services to level up their businesses (names changed to protect privacy).
1. G&D Express saved time and money by switching to OpenRoad, enabling them to help a driver start his own trucking business.
Gary with G&D Express reached out because he needed a lower discount rate, but he was locked in a contract with termination fees and had chargebacks that needed to be paid before he could be released from his factoring company. He needed financial assistance to get out of his auto-renewing factoring contract within the buyout time frame imposed by his factoring company.
OpenRoad covered the upfront cost of G&D’s termination fee and the chargebacks that they accrued at their previous factoring company. Gary was able to get a lower discount rate and avoided hidden fees by switching to OpenRoad. OpenRoad worked with Gary to develop a realistic payment plan so he could pay back the charges he accrued on time.
Gary saves money with his lower discount rate and doesn’t need to worry about monthly minimum fees with OpenRoad. Gary uses the online portal to keep track of his paperwork, payments, and funding with 24/7 access, allowing him to manage his multiple trucks and drivers. In fact, with all the extra time and money savings, Gary was able to help one of his drivers start their own trucking business as an owner-operator. Gary referred his driver to OpenRoad, and they leveraged OpenRoad’s factoring services to get their new business off the ground and running smoothly throughout their first year.
2. American Logistics improved their cash flow by factoring their only slow-paying customer.
David with American Logistics only had one customer who didn’t pay him within net 7 terms. The loads he hauled for this customer were also his highest-paying loads, and they made up a significant part of his accounts receivable. David had never factored before, but since OpenRoad doesn’t impose any contracts or monthly minimums, he was comfortable starting out.
David’s highest-paying customer was a small, local business that wasn’t verified in OpenRoad’s credit checking system, so OpenRoad reached out to the customer directly in order to understand their payment habits and evaluate the risk of extending credit to them.
David was able to factor his highest-paying loads and use those funds to pay his business expenses and simplify his bookkeeping. Since the process was so easy, David ended up factoring all his other customers with OpenRoad. Now he receives payment on all his loads the next day and has more time to focus on his business.
Is Freight Factoring Right for You?
It very well could be! According to data provided by OpenRoad Transportation (a freight broker), they found that in their carrier network of over 36,000 trucking companies, 64% of them utilized a factoring company.
That represents a very large number of carriers who have decided that freight factoring was the best solution for their business – so you’d be in good company. With customers to serve, bills to pay, and a business to run, you can use freight factoring as a powerful tool to change the course of your trucking business.
But your business is unique, and you don’t want a one-size-fits-all solution. We can help you there. You’ve taken the time to research and understand the freight factoring process, which means you are ahead of the game. If you are interested in leveraging factoring to boost your business, you can speak with one of our factoring experts directly to get the process started, or simply answer any additional questions you have.