The old adage - Time is money - briefly summarizes freight factoring. 

You hauled the load. You billed the broker. Then you wait. And wait. Thirty days, if you're lucky. Then you (hopefully) get paid. If not, you follow-up by phone and by email, trying to get someone to act. And then, you wait some more. And, finally, then, you (hopefully) get paid.

Obviously, this is painful and time-consuming, and a job better suited to someone who sits in front of a desk than for busy carrier owners. A majority of carriers use factoring services to solve this problem.

What is Freight Factoring? 

Invoice factoring is an ancient industry, traced as far back to the time of the Babylonian King Hammurabi, about 4,000 years ago.

The basic idea is that factoring companies buy the invoice from you and pay you right away, in exchange for a cut.

Here is an example: you move a load for $2000, and it delivers on Thursday the 1st of the month. The broker has net 30 payment terms, so they don't have to pay you until the 31st. You pay a factoring company 3% to factor all of your invoices, so they pay you $2000 - $60 = $1940 as soon as you complete the load and turn in your paperwork. Most factoring companies can get the cash in your back within 1-2 business days. The factoring company then waits 30 days and collects the full $2000 from the broker on the 31st.

It is important to understand that faster does not always mean all-at-once. Some factoring companies pay most of the amount upfront but hold back a reserve portion until paid themselves (and then the reserve is released). 

The Advantages of Factoring 

There are many reasons factoring is popular with owner-operators. 

The primary reason is payments are received quicker. Usually much quicker. Rather than waiting 30 or 60 days (or longer), payment is made within days. Some factoring companies pay within 24 hours. This is the main reason factoring is used.

Other reasons include:

• Discount programs. Various types of programs are available to help save money on purchases. Fuel discount programs are the most popular. Equipment leasing and trucking software program discounts are sometimes available.
• Credit checks on brokers (free, and often unlimited).
• Online programs to manage accounts and mobile apps.
• Hassle of collecting invoice amounts is minimized. The cost in labor and time to process invoices is significant for many carriers. Reducing this offsets a portion of the factoring fees.

The Disadvantages of Factoring

Nothing is free. There is a cost to get the money quicker and the owner-operator pays that cost. And that is the main disadvantage: you pay for it. 

Factoring companies take a percentage of the invoice amount for their services. That amount could be as low as 1% and as high as 5%. And that excludes any additional fees which can increase the real factoring cost. 

There are other drawbacks:

• Fees. Set-up fees, ongoing fees (such as invoice, mailing, or monthly), and other fees: they vary, but add up.
• Restrictions. Some allow carriers to factor only a portion of their invoices, but others require all invoices to be factored.
• Minimums. Some require a minimum amount of business volume per month. Others lock the carrier into a minimum time period.
• Some waiting for funds may still happen. It is normal for many factoring companies to hold back a reserve amount until payment is received. (See Reserve Amount below.)
• Complicated contracts. Many factoring contracts have unfavorable terms for carriers, and a high cost to exit early.
• The invoice that is sold may return in a nasty way (see Recourse below). This should not be a common occurrence but is a possibility.

Reserve Amount  

Some factoring companies will pay 100% of the amount due to you-- after their percentage is deducted, of course. There are also some companies that only pay a portion upfront - perhaps between 85% and 95%. The remaining 5% to 15% of the funds (which are owed to you) will be held in reserve. After the factor is paid by the broker, then the reserve amount will be released to you.

For example, if you sell your $2,000 invoice to a factoring company that charges a 2.5% fee (for the first 30 days, more if longer), assuming there were no other fees, you should receive $1,950 from the factoring company. If the factoring company pays 90% right away and holds 10% in reserve, you would be paid $1,755 upfront and the other $195 after the factoring company received the invoice amount from the broker - in 30 or 60 days, or however long it takes. 

Sometimes a factoring company with a slightly higher percentage charge that pays more on the front end may be a better option than a company with a lower fee percentage that retains a higher reserve amount (the reserve amount that is due to you). It depends on the details. 

Recourse Versus Non-Recourse Factoring  

The factoring company determines fees based on factors such as the value of money advanced, the services required to collect the funds, and the risk of default by the company that owes the money. 

It is common for factoring companies to minimize their risks by contractually requiring the owner-operator to return the funds for any invoice that becomes uncollectable. The factoring company has recourse to come back to get the money owed. This helps to keep the fees from the factoring company lower. And means you retain the risk on non-payment. 

Some factoring companies will offer non-recourse factoring. So, if the invoice ends up not being paid the factoring company should not come back to you to claw back funds already paid (but any reserve will not be paid to you). When the factoring company accepts the invoice, they also accept the associated risk it might not be paid. That risk will be included in their fees, however. And the fine print of the contract needs to be reviewed carefully. There may be restrictions on this only being applicable in certain situations (such as a company going out of business or bankrupt). 

About TrueNorth

TrueNorth is a single platform for carrier owners to run and grow their businesses. We work with all factoring companies, and can recommend options based on your needs.