Freight Factoring: A Complete Guide for Trucking Companies
Not sure if freight factoring is right for your trucking company? Unclear on what factoring even is? Find detailed answers here.
Freight factoring is a financial tool that gets trucking invoices paid quickly, side-stepping the industry’s notoriously slow payment cycles. Trucking companies pay a percentage fee for the service—but when fuel bills and payroll come due, 97% of a payment in your bank account is better than 100% still stuck in the broker’s.
Besides, factoring isn’t just a cash-flow solution. It also outsources lots of the back-office tasks that bedevil busy owner-operators and up-and-coming fleet owners. That helps to explain why factoring is so common. In fact, freight factoring is so baked into the trucking industry that many of your partners—brokers, funders, direct shippers—will be surprised if you don’t use a factoring service!
Like any financial business relationship, however, freight factoring can be daunting at first glance. We put together this guide to help you understand what freight factoring is; how it can help; and why you might consider it. Keep reading to learn the ins and outs of factoring trucking invoices, and don’t forget to bookmark the page for future reference.
The bottom line: If you’re struggling with sluggish cash flow in the trucking industry, freight factoring is the solution.
Here’s what you need to know to get started.
Have more questions? Call the Bobtail sales team at 1 (410) 204-2084 for detailed information on freight factoring.
Chapter 1: Freight Factoring—The Basics
Before we get to a definition, we’ve got a myth to dispel.
Consider this an inverse definition, an explanation of what factoring is not: Factoring is not a loan. Factoring companies don’t charge interest. Factored funds don’t show up on your credit report or count against credit limits.
From a distance, factoring may look like a loan: Factoring companies pay you funds that they expect to recoup at a profit, sort of like a bank. But when you look a little closer, it’s clear that this is a unique financial product, uniquely suited to the trucking industry.
So what is freight factoring? Here are definitions for the term as it relates to trucking, both in noun and verb forms. (For more explanations of common factoring terms, see our industry glossary.)
Factoring is widespread because the trucking industry typically operates on 30-, 60-, or even 90-day terms, meaning brokers can have up to three months to pay invoices after you’ve already completed the work. Unless you have a huge amount of operating capital—rare for owner-operators and growing fleets—this quirk of the industry can quickly lead to cash flow problems. Factoring arose to solve the problem.
But if factoring isn’t a loan, how does the money move? What factoring companies do, essentially, is buy your invoices. They pay a bit less than the value of the invoice, but you get paid immediately, without headaches. Later, the factoring company collects the invoice’s full amount from your customer, the shipper or broker.
In the end, you get funds when you need them; the factoring company gets their percentage; and your customer takes their time to pay. Everybody wins. But as we’ve suggested, the cash advance is just one of the benefits of freight factoring.
Freight Factoring As An Outsourced Back-Office Solution
Owner-operators usually don’t have a lot of time for accounting, record-keeping, or hounding brokers and shippers for late payments. The same is true for small fleets and new trucking companies operating without a full office staff. The solution is to outsource some of your vital back-office tasks.
Factoring companies often provide these services, which are part and parcel of the factoring process. Start a factoring relationship to keep cash flowing, certainly, but also to outsource a variety of back-office work like:
- Customer credit checks. Should you accept that load from a company you’ve never heard of, or is there a chance they’ll stiff you? Factoring companies can help with these decisions; they keep their own credit profiles on shippers, and can even run independent credit checks before accepting a new company’s business. At Bobtail, we provide these credit checks absolutely free.
- Outbound invoice processing. Sending and following up on invoices can be hectic. You’ll spend a lot of time on hold to get payment statuses, and the level of administrative work can be overwhelming if a problem arises. At Bobtail, we’ll handle this part of the business for you, making sure invoices reach the right person and issues are resolved quickly.
- Soft collections. It’s a lot of work to chase down a late payment. When you factor an invoice with Bobtail, we’ll work with your customer to make sure all funds get where they need to be—long after you’ve already been paid. But be careful: not all factoring companies will make the effort to follow up with brokers, so make sure you choose your company wisely!
- Financial reporting. Many factoring companies provide detailed online reporting on all your shared transactions. For example, the Bobtail Dashboard provides simple access to all invoice updates, bank transfers, upcoming chargebacks, and factoring paperwork.
Some trucking companies factor invoices because they need cash quickly. Others partner with factoring services because they don’t have the office staff to handle collections or accounts receivable. Most do it for a combination of these benefits. So how do you know if factoring is right for your trucking company?
Chapter 2: How To Tell If You Should Factor Invoices
If any of these scenarios apply to your business, freight factoring can help you succeed:
Chapter 3: The Freight Factoring Process, Step By Step
Now that you know what factoring is, let’s discuss how it works. Here’s a step-by-step walkthrough of a typical factoring process.
- You deliver a load. Carriers typically bill after the job is complete. That’s no different with a factored invoice.
- You submit job documentation to your factoring company. You’ll need to deliver a few documents to factor an invoice. These include:
- Key invoice information (shipper or broker’s name, load number, rate)
- A clear bill of lading (BOL)
- The job’s rate confirmation
Digital documentation submission is simple with Bobtail, so you don’t have to deal with paper or delays.
- We pay you. Bobtail deposits funds directly into your bank account. We offer same-day payments on all invoices submitted before 11 a.m. Eastern time, and next-day funding for later submissions.
- We collect payment from your customer. When the bill comes due, your customer pays it directly to the factoring company. You’re long done with the process by then (unless there’s a problem collecting, which we’ll discuss further in the last chapter of this guide).
Before you can start factoring invoices, however, you need to establish a relationship with your factoring partner. That starts with an application. Here’s what you need to know.
Chapter 4: Understanding The Factoring Agreement
Bobtail makes it easier than most to apply. Simply sign up for our free, seven-day trial, or call our sales team at 1 (410) 204-2084, and a Bobtail representative will verify your documents and email you a digital agreement. Once the agreement is signed, we’ll activate your account within a few business days. Factoring agreements typically ask for a few pieces of crucial information, including:
- Fleet profile (number of trucks, trailers, drivers, etc.)
- DOT number
- MC number (interstate operating authority)
- Copies of commercial drivers licenses (CDLs) for you and/or company drivers
- Proof of freedom from pre-existing liens
- Other corporate documents (proof of insurance, operating agreements, etc.)
Your factoring partner will perform due diligence, ensuring you don’t have creditors who could be first in line for repayment. But Bobtail doesn’t check a carrier’s credit, neither personal nor business; we’re only interested in credit ratings for the customers who are responsible for payment. Once everything goes through, congratulations: You now have a factoring partner.
But what else do you need to know to get the most out of your factoring agreement? Here are a few frequently asked questions to clear up the vagaries of freight factoring.
Chapter 5: Frequently Asked Questions About Freight Factoring
1. Do factoring companies make you sign a contract?
That depends on which factoring company you choose. Many traditional providers do lock carriers into contracts, which carry certain risks, such as:
- Long agreement terms, often up to three years at a time.
- Volume requirements, which force carriers to factor most or all of their invoices—even for customer’s they’d rather bill directly.
- Holding reserves, a portion of invoice funds that your factoring company retains until the customer’s payment clears, often in the 10% to 15% range.
- Hidden fees, including charges for bank transfers, credit checks, account set-up, and contract termination.
The good news is that you don’t have to sign a restrictive contract to factor invoices. Bobtail doesn’t make you sign a long-term contract; you choose which invoices you’d like to factor, without volume requirements or limits, and you can come and go as you like with just 30-day notice. That keeps control of your business where it belongs: firmly in your hands.
2. What’s the difference between “recourse” and “non-recourse” factoring?
Maybe you’ve wandered into an online debate about recourse vs. non-recourse factoring. Here’s what those terms mean:
Recourse factoring places the responsibility for customer payments in the carrier’s hands. A recourse agreement allows the factoring company to issue carrier chargebacks on funds that customers eventually refuse to pay.
Non-recourse factoring includes some protections for carriers. Usually, it just means that the carrier won’t have to return payments if the broker files for bankruptcy before paying an invoice.
Based on those definitions, non-recourse factoring may look safer. But the conditions that non-recourse agreements cover are fairly rare, and often aren’t worth the higher costs carriers pay for non-recourse factoring. Non-recourse agreements typically don’t protect carriers from chargebacks associated with late or damaged deliveries, for instance. Non-recourse factoring companies also usually require detailed contracts, sometimes with strict limits on who you can work with. If you want a flexible factoring solution, non-recourse probably isn’t an option.
Bobtail offers recourse factoring agreements—but that doesn’t mean you’ll lose money if a broker or shipper fails to pay. We have several ways to collect on unfilled invoices. If a broker goes bankrupt, for instance, we can draw on the brokerage’s federally mandated bond accounts. They’re required to keep a bankruptcy-protection bond of at least $75,000. We might also collect from the shipper who hired the broker, which is allowed under U.S. law. Typically, these avenues allow us to collect on problematic invoices without holding the carrier responsible.
3. What’s a “notice of assignment,” and what does it have to do with factoring?
When you establish a relationship with a factoring partner, you need to tell customers to pay the factoring company, not your business. That’s accomplished—formally and legally—with a document called a “notice of assignment.”
This document is essentially a contract that clearly lays out the billing relationship between you, your customer, and the factoring company. It ensures you don’t accidentally get paid twice, and keeps all parties fully informed of where funds should flow.
Your factoring provider will issue the notice of assignment; both you and the customer must sign it before you begin factoring. The process is simple with Bobtail, and if you have any questions, your account manager will walk you through the process.
4. Do brokers use factoring, too, or is this tool just for carriers?
Brokers do use factoring quite a bit! As market liaisons who frequently work with new shippers, brokers rely on factoring companies to verify that potential customers have good payment histories. Brokers also need access to steady cash flow to pay carriers.
In fact, both brokers and carriers may factor their invoices for the same load. The broker issues an invoice to the shipper who hires them, then the carrier factors the invoice they send the broker. They’re two different transactions, two different invoices, even though they’re both for the same load—and both parties, brokers and carriers, can factor those invoices.
5. How much should carriers expect to pay for factoring?
Factoring rates vary widely, based on the contract’s terms and conditions, and on the size of the carrier’s business. Regardless of the factoring fee—a percentage of invoice value—watch out for hidden costs, as noted above.
Bobtail doesn’t charge hidden fees of any kind. You just pay one low factoring rate: a maximum of 2.99% for companies with one to three trucks, and less for higher-volume accounts. We don’t charge fees for set-up, termination, bank transfers, credit checks, or anything else, so you always know exactly what you’re paying. With Bobtail, the factoring rate is the factoring cost—two figures that seem similar, but can lead to big differences.
6. What’s the difference between a factoring rate and a factoring cost?
The factoring rate is the percentage of invoice value that you pay for your factoring service. That’s the 2.99% figure mentioned in the last question, for example—and, as noted, that’s the total cost of factoring with Bobtail.
With factoring companies that charge extra fees, however, you’ll pay more than this rate. The total amount of money you spend on a factoring service is your factoring cost, and it may not end with additional fees. Beyond the factoring rate, you may need to figure the following into your total factoring cost:
- Set-up fees
- ACH fees
- Processing fees
- Monthly fees
- Termination fees
- Labor costs for time spent resolving invoice issues
When considering a partnership with a factoring company, don’t make a decision based on the factoring rate alone. Ask about additional costs, including the average length of a call to their customer service department. Or, for a simpler solution, choose Bobtail.
7. What’s the best way to get started with freight factoring?
The simplest way to start factoring is also the easiest way to continue: Sign up for a free, seven-day trial with Bobtail. As of publication, we’ve funded more than $450 million worth of invoices, serving more than 2,000 clients (and counting!) Our application process is fully digital, and streamlined for quick service. A Bobtail Account Executive will guide you through the agreement process, then an Onboarding Specialist helps you set up your account. If you have questions later, you can easily contact your dedicated Bobtail support team. They provide quick, friendly help with anything from technical problems to invoice requests.
Our simplified app and client dashboard allow you to factor your chosen accounts, while our flexible month-to-month agreement keeps you free to continue direct billing with whoever you’d like. This is a factoring tool built by truckers, for truckers, and it’s ideal for the busy owner-operator and the growing fleet alike.