What Does a Freight Factoring Company Do?

Most trucking company owner-operators have heard the term ‘freight factoring’ used in the industry. Freight factoring can benefit many of those working in the trucking industry, so it is worth understanding what freight factoring is and how it can benefit your company.

What is Freight Factoring?

In short, freight factoring is when a trucking business sells its outstanding invoices/accounts receivable to a factoring company at a discount to receive a payment within 24 hours. 

Most owner-operators know that you must invoice for payment after truck drivers deliver a load. Frequently, invoices are paid in a time frame accepted by the industry, such as 30, 40, 60, or 90 days. Unfortunately, waiting months for these invoices to be paid can be difficult, particularly if your company is struggling with cash flow or you need the money for living and business operating expenses. 

Freight factoring can address issues with cash flow by allowing the trucking company to get the funds for its outstanding invoices almost immediately. 

Freight factoring follows a relatively standard process that includes the following steps:

• The company transports and delivers the load from one place to another.
• The company signs up with a freight factoring company. All documentation related to the job is submitted to the factoring company rather than the broker once the job is completed.  
• The freight factoring company pays you immediately for the eligible freight invoices covered in the contract.
• Your broker pays the factoring company within the time frame specified on the freight invoice, generally 30, 40, 60, or 90 days after completion of the job. 

Freight factoring services can provide a predictable stream of working capital to keep your business running between completing a load and invoice payments. 

Are There Benefits to Using Freight Factoring Companies?

Before freight factoring became common in the trucking industry, companies often relied on bank loans or credit cards to bridge the gap until an invoice was paid. Unfortunately, these solutions complicate the accounting process and can be incredibly costly since interest is charged. A factoring fee, if extrapolated into an APR, is often higher than a typical credit card or bank loan. However, the factoring companies provide professional services, credit checks, and superior growth flexibility to credit cards and bank loans, which is why truckers often factor rather than consider alternatives. 

Additionally, bank loans and credit cards are dependent on the creditworthiness and years in business of the individual trucker. Factoring focuses on the creditworthiness of the debtor (the company the trucker is hauling for). This makes it a much better solution for brand-new trucking companies and people with poor credit. 

When using freight factoring services, a trucking company sells the outstanding invoices at a discount, which does mean they don’t receive the total amount of the invoice. This immediate payment can help a business stick to its monthly or quarterly budget and cover expenses without racking up additional debt. 

While access to immediate capital is often why trucking companies work with freight factoring companies, there are other benefits to factoring, such as:

• Reducing the amount of back-office and accounts receivable work required for your business. With freight factoring, companies get extra support with this function.
• Freight factoring can help growing trucking companies with insufficient staff by offloading some of the work so the current staff can continue focusing on other job duties.
• Assistance with the communication and payment collections that may come with invoices, particularly for slow-paying clients. 
• Some freight factoring companies offer benefits such as same-day funding and free credit checks if you meet monthly minimums of volume, saving you time and money. These benefits are beneficial for trucking companies without adequate systems in place to complete credit checks for potential customers. And foregoing these checks can put your company at increased risk of non-payment. 
• Factoring is an excellent way for new businesses that may be ineligible for traditional financing to ensure they have cash flow when they need it most. 
• Reduce the risk of not getting paid, as factoring companies can help lower payment risks and give owners and drivers financial support. 
• Fast payment for invoices can occur as quickly as the same day. 
• Freight factoring provides the working capital to keep your drivers paid to continue delivering loads, ensuring your continued revenue stream. 
• Freight factoring companies are often very user-friendly and can integrate with many existing invoicing, billing, and payment systems. 
• It can make sharing invoice data with shippers easier for trucking companies. This data transfer is essential and can maximize supply chain efficiencies. 

These benefits often outweigh the financial cost of the factoring fee for many trucking companies. Freight factoring companies may provide different financial transaction structures to meet your company's needs. Two additional options are generally available, although it is up to the freight factoring company and the terms of the factoring agreement. 

Full Advance Transactions

Full advance transactions are the easiest form of factoring and are generally preferred by new companies and small carriers. It is called a full advance transaction because the factoring company pays you the full advance in a single payment. 

Generally, these advances are between 95% and 98.5% of the full invoice total, while the remaining 1.5% to 5% is the fee for the factoring service. While this option is often more expensive than the two-installment plans, it provides more cash upfront. The funds can be deposited in a bank account or fuel card. This example is just one way in which factoring financing can be structured. Different companies may have different options.

Partial Advance Transactions

Partial advance transactions are more common with medium-sized and large trucking companies. With this structure, the transaction is split between two payments.

The first payment - called the advance - is usually between 90% and 95% of the invoice’s value. These funds can be deposited into a bank account or fuel card within 24 hours of submitting the invoice to the factoring company. The remaining funds, less the cost of the factor’s fee, are deposited into your account once the invoice is paid. This structure is generally used in larger factoring transactions, like oilfield factoring.

Freight factoring can provide many distinct benefits to any trucking business. But often, the most significant benefit is that the owner-operator can get paid immediately, which may be crucial in providing working capital to keep the business afloat. And these arrangements can provide an ideal solution for trucking companies looking to simplify their accounting.

Broker Quick Pay vs. Freight Factoring: Which Is Right for Your Trucking Business?

Trucking companies often rely on broker Quick Pay or freight factoring to improve cash flow, but the two options work differently. With Quick Pay, brokers offer faster payment at a discount. However, most brokers partner with a freight factoring company to provide this service, taking a cut from the carrier’s payment for the service. Since not all brokers offer Quick Pay, you might be stuck hauling for companies with poor terms just to get paid faster.

Freight factoring gives you more control. Instead of waiting 30 to 60 days for payment, you can sell your freight invoices directly to a factoring company and get paid in as little as 24 hours. Many companies use factoring to reduce risk, simplify billing, and unlock steady cash flow for your trucking operations.

Types of Freight Factoring: Recourse vs. Non-Recourse

When comparing types of freight factoring, two terms you’ll often hear are recourse factoring and non-recourse factoring. The difference lies in who takes on the risk if the shipper or broker fails to pay the invoice.

With recourse factoring, the factoring company will pay you upfront for your freight invoice, but your company remains responsible if the customer doesn’t pay. This arrangement typically comes with a lower factoring rate, making it attractive to many freight companies with reliable clients and a solid track record. It’s commonly used in factoring for trucking companies where payment history is predictable.

In non-recourse factoring, the factor assumes the risk in certain cases, such as when a debtor becomes insolvent. Because of that added protection, non-recourse freight factoring usually involves a higher cost of factoring and stricter contract terms. Many factoring companies also provide credit checks as part of the service to reduce risk on both sides.

When choosing a factoring company, understanding which structure fits your needs can help you choose the right factoring solution for your freight business, especially if cash flow reliability is critical.

Streamline Your Compliance and Get Started with Freight Factoring

As trucking compliance specialists who work with trucking businesses every day, we understand how challenging it is to manage cash flow. That’s why we offer a full rebate of your Authority Express fees when you sign up for factoring. To learn more, explore our complete trucking authority packages.