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what is freight factoring

What is Freight Factoring?

If you are a trucking business owner pondering ways to solve the common cash flow problems in your industry, you will probably have heard about freight factoring at some point. You may be wondering: what is freight factoring, and how will it help my business? The introduction that follows will help you answer that question.

Defining Freight Factoring

Freight factoring is a funding method that involves turning your current, payable freighting invoices into cash. It does not involve going into debt, but provides an instant cash injection so you can maintain your running costs without having to wait for your customers to pay.

The Basics of Invoice Factoring

All you need to enjoy the benefits of factoring are payable invoices and trustworthy customers. Once you have an agreement in place with a factoring company, you simply send your invoices to them, and they advance a percentage of the total value to you. This payment is usually made within 24 hours. The factor then takes on the burden of collecting payment from your customers. Once they receive payment, they deduct their factoring fee and pay the balance to you.

Freight Factoring vs. Traditional Financing

Traditional financing, such as a bank loan, requires you to go into debt and pay interest on the capital. Factoring is not like that at all. When you factor your invoices, you are not taking a loan. Rather, you are selling your invoices to the factoring company. The factor then collects payment from your customer, thus recouping the funds advanced to you. What matters most to the factor is that your customer has a good credit history and can be trusted to pay your invoices.

Key Concepts and Freight Factoring Terminology

Having provided an overview of the factoring process and how it differs from traditional financing, it is important that we clarify some of the key terms and concepts involved with factoring. The most important ones that you need to understand from the start are advance rates, factoring fees, and the difference between recourse and non-recourse factoring.

Understanding Advance Rates and Fees

Advance rates in freight factoring refer to the term for the percentage of the invoice total that the factoring company will advance to you when you send your invoices. This rate is generally agreed between you and your factor before you send your invoices, and can be anywhere between 70% and 95%. 

Your factor will charge a fee for its services. This fee is usually deducted either from the advance amount or when the balance is paid later on. It is usually calculated as a small percentage of the invoice total.

Recourse vs. Non-Recourse Factoring

Before signing a factoring agreement, make sure you know whether you are being offered recourse or non-recourse factoring - and the difference between the two. Recourse factoring is where the client is responsible for invoices left unpaid by their customers. Non-recourse factoring shields the client against this risk, as the factoring company assumes all credit risks associated with the invoices.

Benefits and Challenges

As with all business and financial solutions, factoring has both benefits and drawbacks. Keep the following in mind as you consider your factoring options:

Advantages for Trucking Companies

The benefits of freight factoring include:

- Instant cash injections
- No debt, hence better credit ratings
- Credit checks and monitoring on your customers
- Billing and collection assistance
- Increased productivity
- Simple, fast process

Potential Drawbacks and How to Overcome Them

However, you should also keep the following challenges in mind:

- Cost: Factoring can sometimes be more expensive than traditional loans
- Factoring approval depends on your customers’ credit ratings. If your customers have poor credit histories, you may have difficulty factoring their invoices.
- Some factoring agreements can be difficult and costly to cancel. Work with a factoring company that offers flexible cancellation terms.

Is Freight Factoring Right for Your Business?

Considering the brief outline we have provided, is it the right solution for your business? If you have been wondering, “What is freight factoring?” we have hopefully provided an adequate answer. If you need fast cash for your business operations, have invoices to factor and deal with creditworthy customers, factoring may provide the financial solution you need. Contact us for more information, or fill out our online application form today.
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Freight Factoring
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