Getting paid quickly is an ongoing pain point for carriers. It is common in the trucking industry that once you deliver a load, it can be 30-45 days - or longer - before you are paid for that delivery. This means that you have weeks of expenses to cover in the meantime. Factoring and Quick Pay are two solutions to shorten the delay in payment, and depending on your situation, may be especially attractive to both carriers and to Owner-Operators running under their own authority.
What Is Factoring?
Freight factoring, also called trucking factoring, is a concept that applies to the invoice for any product or service. The basic idea is that the person who needs to collect money sells the right to collect the money to another party ‚"the factor" at a reduced price to receive the money more quickly.
For instance, a carrier moves a load for a broker at an agreed rate of $2,000. The driver is owed the $2,000 but does not want to wait 30 days (or more) to get paid. The driver sells the $2,000 invoice to a factoring company in order to get paid more quickly -- usually within a day or two -- but at a reduced rate. In return for the faster payment, the factoring company keeps a percentage of the invoice (the percentage varies, usually from 2% to 5%) so the driver receives less than $2,000. This arrangement does not impact the amount the broker must pay. That remains the same -- the broker paid the full $2,000 to the factoring company.
The services provided by factoring companies vary, as do the rates for those services. However, the underlying concept is the same: the driver is paid faster but at a reduced rate.
Some factoring companies pay most of the amount upfront, but hold back a reserve portion until they get paid themselves, releasing the remaining reserve).
Invoices with factoring companies fall into one of two categories:
- Recourse: To protect against invoices becoming uncollectible, a factoring company may put in the contract the ability to have recourse to come back to get the money owed (on an uncollectible invoice). This protection lowers the fees from the factoring company, but passes a higher risk of non-payment to the Owner-Operator.
- Non-Recourse: Some factoring companies will offer non-recourse factoring. If the invoice ends up not being paid (through no fault of the carrier), this protects you from the factoring company coming back to you to reclaim funds already paid. When the factoring company accepts the invoice, they also accept the associated risk of not being paid.
You can learn more about factoring with our article, What to Know About Freight Factoring.
What Is Quick Pay?
Quick Pay is just as it sounds - a quick payment program. It's quicker than waiting 30 days, but it is not quite as quick as factoring. It is similar to factoring in the most critical aspect: payment is made earlier but reduced.
With Quick Pay, a broker may offer to pay an invoice within a few days (typically 2 to 5 days) but at a reduced rate (typically a 2% to 5% discount) or a flat fee. Not all brokers offer a quick pay option, and there is no requirement to use it with brokers that do. It is optional and can be used selectively (for some invoices but not others). There are no other services offered outside of the payment of invoices.
Note: Some shippers will offer something similar, perhaps payment in 10 days (instead of 30 days) with a 2% reduction in the amount paid. The concept is the same except the time to get paid is normally longer.
Which Payment Option Is Right For You?
Determining the best option for you and your business depends upon your specific needs and preferences for things such as speed of payment and level of risk tolerance. Below we list out the pros and cons of each.
Pros and Cons of Quick Pay
Quick Pay is attractive because there are no recourse issues. Once payment is received, there are no ongoing fees or possible recourse if a shipper does not pay an invoice. Also, there are no reserve funds or other requirements, such as an invoice volume commitment. It is clean – once they pay the funds, the transaction is complete.
The main downside of Quick Pay is the time to receive payment is usually longer than factoring. It is also not something that all brokers offer. Unless you choose to do all your business with brokers that offer it, you will have to wait longer for some invoices to get paid.
Pros and Cons of Factoring
Factoring has the advantage of being used with almost all invoices, although factoring companies may restrict invoices from some shippers or brokers if they think they will not get paid for the invoices. In addition, the time to receive payment is quicker (typically within one business day). The additional services many factoring companies offer are also important, such as discount programs (especially for fuel), broker credit checks and invoicing. Some of these non-payment services can save a carrier a significant amount of money and help offset the cost of the fees.
It should be noted though that factoring agreements require a signed contract, and getting a release from that contract may be difficult. You can read more about factoring contracts and terminations here.
Final Thoughts
Both Factoring and Quick Pay speed up the payment of invoices by discounting the total amount paid to you.
Factoring is slightly faster and can handle virtually all your invoices. Many factoring companies offer services (such as fuel discounts) that are beneficial. But the reserve and recourse restrictions can complicate the payment process.
Quick Pay is simpler. You get paid relatively quickly with a discounted amount. The general rule of thumb is that the shorter the payment days, the higher the discount. Only the payment is involved, with no option for other services.
Other relevant articles:
What to Know about Freight Factoring
The Owner-Operator's Guide to Getting Paid On Time Every Time