Freight Factoring: A Complete Guide for Trucking Companies

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.

Written by bobtail

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.

Table Of Contents

Chapter 1: Freight Factoring—The Basics

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.)

Freight Factoring (noun)

\ ‘frāt \ ‘fak-tər-ēŋ \

A financial product that provides quick (usually same-day or next-day) funding for fulfilled trucking invoices, more formally known as accounts receivable financing.

Factor (verb)

\ ‘fak-tər \

The act of receiving advance funds for unpaid trucking invoices, as in, “to factor an invoice.”

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:

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

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:

Slow cash flow makes it tough to keep up with expenses.

Fuel, payroll, truck maintenance, insurance: Trucking company owners have a lot of expenses. Without dependable cash flow, you can’t keep trucks on the road. If you can’t wait 30 or 60 days for money you’ve already earned, consider factoring.

You’d like to invest in your business, but all your credit goes toward day-to-day operation.

Another truck or trailer could greatly increase your company’s profits—but to grow, you need access to capital. Typically, that comes from credit. If you’re consistently hitting your credit limits just to buy fuel, it’s time for a new approach. Freight factoring keeps your funds flowing without affecting credit limits, so you can devote credit to growth instead of survival.

You spend too much time on billing and collections.

Companies devote entire teams to billing, collections, and related accounts-receivable tasks. If you’re an owner-operator busy delivering loads or a small fleet owner without all the resources in the world, that team is you—unless you find a factoring partner to handle the paperwork for you. With Bobtail, you just submit documents and get paid. We handle the rest.

You have customers who refuse to pay what they owe.

A lot can go wrong in the trucking industry. Companies may go bankrupt out of the blue. There may even be willful bad actors out there. Factoring companies provide a layer of security that can protect you from a missing payment. At Bobtail, we provide free credit checks on request, so you can choose customers who are accredited, with a track record of doing the right thing by their carriers. If something does go wrong, our customer service and operations teams will work hard to mediate the situation with brokers and shippers.

You’re stressed about keeping money flowing into your trucking business.

Peace of mind shouldn’t be an afterthought. With a factoring partner like Bobtail on your side, you can rest easy knowing your invoices will get paid quickly—and your dedicated account manager is always ready to provide support, information, and assistance along the way.

Any of the above struggles look familiar? If so, solve the problem with invoice factoring from Bobtail. Sign up for a free trial today!

Chapter 3: The Freight Factoring Process, Step By Step

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.

  1. You deliver a load. Carriers typically bill after the job is complete. That’s no different with a factored invoice.
  2. You submit job documentation to your factoring company. You’ll need to deliver a few documents to factor an invoice. These include:
    1. Key invoice information (shipper or broker’s name, load number, rate)
    2. A clear bill of lading (BOL)
    3. The job’s rate confirmation

    Digital documentation submission is simple with Bobtail, so you don’t have to deal with paper or delays.

  3. 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.
  4. 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 Application

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:

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

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:

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.

Learn more: Freight Factoring Contracts: What To Watch Out For

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.

Learn more: Recourse Vs. Non-Recourse Factoring: Which Should Trucking Companies Choose?

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.

Learn more: What Is A Notice Of Assignment In The Trucking Industry?

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:

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.

Learn more: Bobtail Pricing

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.

Ready to get quick funding while retaining full control over your business? Start freight factoring with Bobtail by signing up for a free trial today!