How does freight factoring work for a trucking company?

How does freight factoring work, step by step?

You haul a load, deliver it, and invoice the broker or shipper. Normally you wait, often 30 days or more, to be paid. With factoring, you sell that invoice to a factor instead, with the paperwork that proves the delivery. The cycle usually runs like this:

1. You deliver and submit the invoice. You send the invoice and the documents the factor asks for, usually the rate confirmation, the bill of lading, and proof of delivery.
2. The factor advances part of the invoice. The percentage it pays up front is the advance rate. The factor sets it, and it can differ by customer and by contract.
3. The factor collects. Your customer is told to pay the factor, not you. That instruction is the notice of assignment.
4. You receive the reserve. When the customer pays in full, the factor sends you the held-back balance, called the reserve or rebate, minus its fees.

Two points get missed. The reserve is your money, held until the invoice is paid. It is not a fee, but it does limit what you can spend today. And because the factor takes over collecting, your customers will see its name on the payment instructions.

Factoring pays for freight you have already delivered. It does not pay for a truck, and it does not cover fuel on its own. For the product page, see factoring.

What does the notice of assignment change for my customers?

Under the Uniform Commercial Code, a customer who owes an assigned invoice may pay the original owner until it receives a notification of the assignment. After it gets a proper notification that the payment is to go to the assignee, it can no longer clear the debt by paying you (UCC 9-406(a)).

That has a practical side. If a customer pays you directly after the notice, your contract will usually treat that money as the factor's, so read what it says about forwarding it. Also, brokers who see a factor's name on your invoices will see you as a factoring client, which is routine in freight but worth knowing.

What is the difference between recourse and non-recourse factoring?

This decides who takes the loss when a customer does not pay.

• Recourse. If the customer does not pay, you are responsible. You replace the invoice or repay the advance. Fees are often lower, because the factor takes on less credit risk.
• Non-recourse. The factor takes the loss, but only in the cases the contract lists. Many contracts limit this to a customer's insolvency or bankruptcy. Disputes, short pays, late deliveries, and cargo claims are commonly excluded and stay with you. Fees tend to be higher.

Read three things in any non-recourse contract: how it defines non-payment, how long the factor waits before it treats an invoice as unpaid, and which customers it covers. "Non-recourse" on the sales page and non-recourse in the contract can mean different things.

What does freight factoring cost, and what fees come with it?

Providers set their prices, not BreadRoute, and we do not state typical rates. What we can lay out is how the cost is built, so you can compare offers on the same footing.

• Factor fee (discount rate). Either a flat percentage of the invoice, or a percentage that grows with each period the invoice stays unpaid.
• Advance rate and reserve. A lower advance means more is held back and you have less cash today.
• Add-on fees. Wire or ACH fees, invoice submission fees, credit checks on new customers, lockbox or mail fees, and fuel advance fees.
• Minimum volume. A required monthly amount of invoices, with a charge if you fall short.
• Term and exit. Length of the contract, automatic renewal, notice required to leave, and early termination fees.

The way the fee is structured matters as much as its size. Here is an example only, with invented numbers, not typical or offered rates: you factor a $1,000 invoice at a 90% advance with a flat 3% fee. You receive $900 up front. The fee is $30. When the customer pays, you receive the $70 left over from the reserve. Now suppose a different contract charges 1% for every 10 days or part of 10 days the invoice is outstanding. If your customer pays in 35 days, four periods have started, so the fee is 4% or $40. A flat-looking fee and a per-period fee can cost very different amounts when customers pay slowly.

The calculator below lets you enter your own advance rate, fee, and payment timing. It uses only your numbers. Its defaults are examples, not market rates. You can also open the factoring cost tool on its own page.

What should I look for in a factoring contract?

The FTC's advice to small businesses fits here: read the contract, not the advertising, and work out how much you net after every fee against what you will owe in total. Its examples include ads that claimed no personal guarantee while the contract contained one, and fees that were deducted from the advertised amount.

For factoring, check:

• Spot or contract. Spot factoring lets you pick which invoices to sell. A contract commits you to selling all invoices, or all invoices to certain customers, for a stated term, sometimes with minimum volumes and termination fees.
• The lien. Factors usually file a UCC financing statement on your receivables. A filing by one factor or lender can block another from funding the same invoices, so tell every provider what is already on file.
• Chargebacks. What happens if a customer short-pays or disputes, and how long you have to make it right.
• Fee schedule. Treat a "no hidden fees" claim as a promise to verify. Ask for every fee in writing.
• Notification. In freight factoring your customer is usually told to pay the factor. If a provider offers a version where customers keep paying you or a lockbox, ask how it works and what it costs.
• Fees before terms. The FTC says an up-front fee collected before a loan is granted is a cue to walk away. The same caution fits any company that wants money from you before it has issued terms.

Who typically uses freight factoring?

Factoring is built around invoices to businesses, so it fits carriers who bill brokers and shippers on terms. It tends to show up for new-authority owner-operators, small fleets, and OTR and local haul operators, partly because the decision leans on your customers' payment record more than on your own history. A single truck can run into minimum volumes that are heavy for its invoices, so ask each provider what its minimum is. Brokers can look at factoring too, though freight broker invoices raise different questions than carrier invoices.

Factoring is not the only way to bridge the wait. Working capital and a line of credit are different products. BreadRoute is not a lender, and no one can tell you in advance what a provider will offer. A financing request goes to third-party providers, who make their own decisions on terms.