What Is Factoring In Trucking? A Factoring FAQ
Factoring can get your invoices paid a lot faster. But what is factoring in the trucking industry in particular? Find out in this detailed FAQ.
In today’s supply chain, money follows freight—and not the other way around. Trucking companies often face a significant gap between delivering a load and getting paid. It’s not uncommon for shippers to operate on net-60 terms; upon receipt of an invoice, they can delay payment for two months. When you need to fill the gas tank or make payroll, that can be a serious problem.
Why does the industry operate this way? It’s because of the broader cash flow picture. Manufacturers typically don’t get paid in full until their products are delivered. If that manufacturer doesn’t have a lot of liquid cash, they have to get paid before they can pay the carrier who delivered the order. So that’s one source of delay.
Things get more complicated when you bring in the broker, a third party who connects shippers with carriers. If a broker connects you to the shipper, not only does the shipper need to get paid—following delivery—so does the broker. Only then does the broker pay the carrier.
Cash takes time to flow from one of these parties to the next, and carriers are usually last in line.
When you see the big picture, it’s clear why payment delays are so common in this industry. It’s just the way the money moves.
Luckily, there’s an easy way to get trucking invoices paid promptly. It’s called factoring. But what is factoring in trucking? Keep reading for answers to this and other frequently asked questions about factoring in the trucking industry.
What is factoring in the trucking industry?
Factoring is a financial tool that pays your invoices quickly—often the same day you submit them. Factoring companies buy trucking invoices for the full amount, minus factoring fees, which are often quite low. For instance, the factoring fee at Bobtail ranges from 1.99% to 2.99% of invoice value, depending on the size of your business.
When payment comes due, factoring companies collect from your customer. So factoring isn’t just a way to get quick funding; it also outsources collections so you can focus on the next load.
Above all, factoring is a solution to the problem of slow payments to carriers. If you have open invoices, and you need to get paid now, factoring is the right tool for the job.
What’s the difference between factoring and a loan?
At first glance, factoring may sound like a short-term, value-backed loan. It isn’t.
Factoring companies aren’t lending money, they’re buying your invoices at nearly full value. This distinction may seem subtle, but it has measurable bottom-line effects.
You don’t pay interest on a factored invoice like you do on a loan. And factored funds won’t impact your credit reports—or limits. That frees your credit to make major purchases, like buying a new truck or trailer. Given the choice between factoring invoices and a loan, go with factoring every time.
When should you consider factoring an invoice?
We’ll start with the simplest answer: Factor invoices when you need the money.
If you have to buy fuel, or a vendor’s payment is coming due, or you have to make payroll, factoring can get your invoices paid immediately.
If you work with a broker, factoring is often a good idea. That can be an essential source of business, but it can also extend the payment cycle—as brokers have to get paid before they pay their carriers. It’s an extra step in the cash flow process.
Factoring companies also provide an extra layer of protection for carriers working with brokers. Brokers may offer loads from shippers who don’t have the best creditworthiness. Factoring companies keep their own blacklists, and may be able to spot a shipper with a reputation for withholding payment—saving carriers from a billing headache.
So when do you not need factoring? Again, there’s a simple answer: When you don’t need the money.
If you develop one-to-one relationships with customers, the payment cycle is usually a bit faster. You might not need to factor invoices in this scenario. But when you’re working with brokers or shippers you’re not familiar with, factoring can drastically speed up payment while also monitoring the customer’s credit to save you from payment headaches down the line.
What are the risks of factoring invoices in the trucking industry?
So far, factoring seems like a simple and affordable way to get funds when you need them. (Compare a factoring fee of 2% or 3% with the average credit card interest rate of 19.49%, for instance.) But is a factoring company—a helpful partner or just another creditor? That depends on the company.
Some factoring providers charge hidden fees for everything from setting up your account to bank transfers. They may hold a portion of your payments in reserve until they collect from the customer. Many require trucking companies to sign restrictive contracts, complete with volume requirements, which force you to factor invoices you may wish to collect directly.
These contracts can even refuse to work with shippers or brokers that don’t pass their credit checks. If you’re under a restrictive contract, those customers are off limits, even if you have a long and satisfying business relationship. (Learn more about invoice factoring risks—and how to avoid them—here.)
In short, the risks of invoice factoring depend on the factoring company. It’s essential to pay attention to the fine print. Or, even better, you could choose a factoring service that omits the fine print entirely—a company like Bobtail.
How can you get the benefits of factoring while minimizing the risks?
Factoring shouldn’t involve complicated partnerships that diminish your agency as a business owner. Bobtail offers all the advantages of factoring without nasty surprises.
We’re a different type of factoring company. Designed by truckers, for truckers, we do away with all the contracts, hidden fees, and volume requirements to boil factoring down to its essential purpose: quick funding for trucking invoices.
If you want to factor an invoice, we keep the process simple: Just open the Bobtail app, upload your invoices, and get funded. We provide same-day funding for all invoices submitted by 11 a.m. Eastern. If you miss the deadline, you’ll get your payment the next day. Your dedicated account manager can help you every step of the way, and we even provide free credit checks to help you evaluate brokers and shippers.
For all this, you pay one low factoring fee of 2.99% (or less for high-volume accounts). It’s that simple. Factor what you want, when you want, without restrictions. The easy-to-use mobile app allows you to factor invoices from the road, with just a few scans and taps.
Bobtail provides a whole new answer to the question that kicked off our FAQ: What is factoring in trucking? It’s the simplest way to collect on trucking invoices when you need the funds—not when shippers or brokers are ready to pay.