Freight factoring is a powerful financial tool that is used heavy in the logistics industry. Whether you are a large trucking company, a single owner operator, a freight broker, or even a large 3PL; freight factoring can be a useful tool.
What is freight factoring?
Freight bill factoring is the process of selling your accounts receivable to a third party, in exchange for an immediate cash advance. The freight factoring company that you sold your invoice to will then be responsible for collecting payment from your customer. In some cases, you will be responsible if your customer doesn’t pay, and in other cases you won’t.
Why should you factor your freight bills?
After you haul a load for your customer, or broker it out to a carrier, you will have to wait 30 to 60 days (or more in some cases!) before your customer will pay. This can be a huge drag on cash flow. In the meantime, carriers have trucks to fuel and drivers to pay. In the case of a freight brokerage, there are carriers to pay (often times within 21 days), and possibly freight agents to pay as well.
Freight factoring companies provide relief in these cases. Often times, you can see an invoice funded in as little as 24 hours. In the current age of tight banks and increasing difficulty in obtaining a traditional loan, factoring your freight receivables is a great alternative.
How does it work?
The process is simple. It obviously begins with you booking or hauling a load. If you have done business with the customer before, you will automatically receive the green light to book the load. If you haven’t worked with this shipper before, your factoring company will perform a credit check prior to authorization.
Once the load is delivered, you simply submit the signed bill of lading, proof of delivery, or other supporting documents to the freight factoring company. Some companies will have website applications or even mobile apps to allow you to submit the documents with ease. Once they receive them, you can see the funds hit your account in 24 hours.
There are two primary types of freight bill receivable factoring. They are:
The difference lies in what happens if the customer doesn’t pay their bill. If you opt for nonrecourse factoring, you will not be responsible for collections (or covering the cost) if a customer
The advantages paint a pretty clear picture about the popularity of freight factoring. The major advantages include:
- Based on your customer’s credit, rather than your own
- Easier to obtain than a traditional loan
- Can see the funds in as little as 24 hours
- Allows you to focus on hauling freight and booking loads, rather than collections
- Allows you to quickly grow your business
Another major advantage is the outsourcing of your billing. If you are a single owner operator, or even a small trucking company, your time is better spent securing loads and hauling the freight to move in the first place! Consequently, freight brokers can better spend their time cold calling new potential shippers.
While it is a service that can be beneficial to your company, there are some disadvantages you should know about freight bill factoring.
- Potentially high costs and fees
- May be required to commit to a minimum
- May be required to factor all of your receivables, or all from a particular customer. Even if you don’t have to
Many companies also provide other perks and benefits to trucking companies and freight brokerages that use their service. They include:
- Fuel advances
- Fuel discount cards
- Tire and maintenance discounts
- Credit checks
- Alternative payment forms such as ComData
- Access to private load boards