Freight factoring for carriers and brokers

How does freight factoring work for a trucking operation?

You haul a load, deliver it, and send an invoice to the broker or shipper. Normally you wait for them to pay, often 30 days or more after delivery. With factoring, you sell that invoice, along with proof of delivery, to a factor instead. Federal bank examiners describe factoring as the purchase of receivables outright, with or without recourse.

A typical cycle:

1. Submit the invoice. You send the invoice and paperwork, usually the rate confirmation, bill of lading, and proof of delivery.
2. Get the advance. The factor pays you a percentage of the invoice up front. That percentage is the advance rate. Bank examiners define an advance rate as the maximum percentage a lender lends against a type of collateral. In factoring, the number is set by the provider and varies by customer and contract.
3. Your customer pays the factor. In most arrangements, the factor tells your customer to pay it directly. This is the notice of assignment. Under the Uniform Commercial Code, once a customer receives proper notification that an invoice has been assigned, it has to pay the new owner. Paying you after that does not clear its debt. Factors commonly handle the accounting on the invoices too.
4. Receive the reserve. When your customer pays in full, the factor sends you the held-back balance, called the reserve or rebate, minus its fees.

Two things worth knowing up front. First, the reserve is your money, held until the invoice is paid. It is not a fee, but it does affect what you can spend today. Second, because the factor takes over collecting, factoring changes who your customers deal with. Brokers and shippers will see a notice that names the factor.

What can factoring cover, and what structures are common?

What it covers. Invoices for freight you have already delivered: truckload, LTL, local, and courier work billed to brokers, shippers, or other businesses. Some factors will also advance on invoices to customers in other lines of business. It does not pay for a truck, and it does not cover fuel costs on its own, though some providers offer fuel advances or fuel cards alongside. See fuel cards.

Recourse or non-recourse. This decides who takes the loss when a customer does not pay.

• Recourse. If the customer does not pay, you are on the hook. You replace the invoice or repay the advance. Fees are often lower, because the factor carries 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, chargebacks, and late deliveries are often excluded and stay with you. Fees tend to be higher. Read how your contract defines non-payment, how long the factor waits before it counts an invoice as unpaid, and which customers it covers.

Spot or contract. Spot factoring lets you choose which invoices to sell, one at a time. Contract (or whole-ledger) factoring commits you to selling all invoices, or all invoices to certain customers, for a stated term. Contracts can carry minimum monthly volumes and termination fees if you leave early. Ask which one you are signing.

Notification or not. In freight factoring, your customer is usually told to pay the factor. Bank examiners also describe non-notification arrangements in receivables financing, where customers keep paying the business or a lockbox. If a provider offers a non-notification option, ask how it works and what it costs.

The lien. Factors usually file a UCC financing statement on your receivables, a public notice of their interest. Lenders and factors search for earlier filings. A lien from one factor or lender can block another from funding the same invoices, so tell every provider what is already filed.

What affects the cost and eligibility of factoring?

Factoring is priced by the provider, not by BreadRoute. These are the pieces that make up the total cost, and the things providers look at.

Fee structures to watch for

• Factor fee (discount rate). The main charge. Some factors charge a flat percentage of the invoice. Others charge a tiered amount that grows the longer the invoice stays unpaid. A flat-looking fee and a tiered fee can cost very different amounts if your customers pay slowly.
• Advance rate and reserve. A lower advance rate means more money held back. The reserve is returned when the invoice clears, but a larger reserve means less cash today.
• Add-on fees. Wire or ACH fees, invoice submission or upload fees, credit check fees on new customers, lockbox or mail fees, and fuel advance fees. Ask for every one.
• Minimum volume. A required monthly amount of invoices, with a fee if you fall short.
• Term and termination. Length of the contract, automatic renewal, notice required to leave, and early termination or exit fees.
• Chargebacks. What happens if a customer short-pays or disputes. In recourse deals, the factor charges you back. Learn the timeline.
• Contract language on "no hidden fees." Treat any such claim as a promise to check, not a fact. Read the fee schedule.

What providers look at

• Your customers' credit and payment history. Because the factor is collecting from your customers, their ability to pay is central. A load with a reliable payer is a different risk than one with a slow or unknown payer.
• The invoices. Whether they are clear, undisputed, and backed by delivery paperwork.
• Your history and any existing liens. Time under your authority matters less than it does for a truck loan, because the customer is the main risk, but providers still ask. They check for liens on your receivables and for unpaid payroll or tax debts.
• Concentration. Relying on one or two customers for most of your revenue can change terms.

A caution. The FTC has warned small businesses about financing offers whose real cost is hidden in fees deducted from the advertised amount. And any up-front fee demanded before a provider has even made an offer is a warning sign.

Some states require commercial financing providers to give standard cost disclosures with a specific offer. California, New York, Utah, Virginia, Connecticut, and Texas are among the states that have enacted disclosure or registration rules for commercial or sales-based financing, and the details vary. California, New York, and Utah list factoring or accounts receivable purchases among the covered transactions. The Virginia, Connecticut, and Texas laws are written for sales-based financing. Dollar limits and exemptions apply in each state. Ask each provider for the full terms in writing, plus any disclosure your state requires.

Who typically uses factoring?

• New-authority owner-operators. Often the first financing product that fits a new authority, because the decision leans on your customers' credit more than on your own history. Terms and availability still vary, and some contracts carry minimums that are heavy for a single truck.
• Small fleets. To keep payroll, fuel, and repairs moving while 30-day invoices age. Compare spot and contract structures, and check whether a factor can handle several trucks under one account.
• OTR and local-haul operators. Long payment cycles and fuel are the usual reason. Check the advance timing and any fuel advance terms.
• Couriers. If you bill businesses by the job on net terms, factoring can smooth cash flow. If you are paid per delivery by a platform on a fixed schedule, there may be nothing to factor.
• Brokers and dispatchers. Brokers pay carriers on a schedule, often before the shipper pays them. FMCSA describes a broker as arranging transportation by using an authorized motor carrier. That makes the shipper's invoice the asset to finance. Many brokers find accounts receivable financing a closer fit than carrier-style factoring, so compare both. Dispatchers paid a percentage of a carrier's revenue usually have no invoices of their own to factor.
• Towing and repair shops. Motor clubs, fleets, and insurers often pay on slow terms. If your customers are businesses on net terms, factoring can help. Individual customers paying at the counter are not invoices a factor wants.