Last Updated on July 28, 2023
The freight and trucking industry heavily depends on prompt invoice payments to cover operating costs. Unfortunately, trucking companies may need to wait weeks or even months for customers to pay, creating a cycle of negative cash flow and mounting debt.
To keep your trucking company competitive and growing, you need cash to pay your drivers, maintain equipment, cover insurance, and run more lanes – this is where freight factoring comes in. In this article, we discuss how truck factoring works, its benefits, and how it compares to other commercial trucking financing options.
Read on to learn how altLINE can help your business with freight factoring!
What Is Freight Factoring?
Freight factoring is the process of selling unpaid invoices to a third-party company, such as altLINE, in exchange for a cash advance. Freight factoring is known by many names including truck factoring, freight invoice factoring, transportation factoring, and freight bill factoring. This type of financing for trucking companies is most commonly used to improve cash flow, pay down debt, hire more drivers, cover expenses, such as insurance and fuel costs, and pay your employees on time. Thanks to the cash advance that you receive with freight factoring, you can stress less about waiting for your customers to pay and instead focus on successfully running your trucking business.
How Does Freight Factoring Work?
Factoring freight bills through a commercial truck factoring company works by selling your unpaid invoices for a cash advance. By factoring your trucking invoices, you can receive payment much more quickly, relieving the stress of long customer payment cycles and helping you fund your operations and business growth.
Who’s Involved in a Factoring Transaction?
- The Seller (Your trucking business)
- The Debtor (Your customer)
- The Factor (The factoring company)
Here is a step-by-step overview of how factoring works in trucking:
Submit Your Unpaid Invoices to the Factoring Company
Once you send an invoice to a customer, you can submit that unpaid invoice for factoring. Here at altLINE, a customer in need of factoring sends a funding request via email and submits their invoices to their dedicated account manager, who processes the request for factoring.
The Factoring Company Advances Up to 99% of the Invoice Face Value
With traditional invoice factoring, advance rates are usually 75-90% of the invoice value; however, in freight factoring, advance rates tend to be higher, usually 90-99%. The advance rate is determined at the start of the factoring relationship when the contract is signed.
The cash advance is typically deposited between 24 and 48 hours after the invoice is submitted for factoring. If you need your advance sooner, many trucking factoring companies, including altLINE, offer same day funding options. However, keep in mind that the exact timing of your cash advance deposit usually depends on your customer’s receipt and acknowledgment of goods.
The Factoring Company Helps Collect Payment for Your Outstanding Invoices
Your factoring company will monitor and support the payment collection of your outstanding invoice. Here at altLINE, we provide a secure lockbox for customer payments and report collection progress through an online customer portal. If issues arise, our team can also communicate with your customers to resolve them professionally, ensuring your business relationships are well-maintained.
altLINE Pays Out the Remaining Invoice Value
After we collect the outstanding invoice payment from your customer, we deduct our factoring fee (typically 1-5% of the invoice value) before sending the remaining money to your company.
Invoice Factoring Example for Trucking Companies
To better illustrate the freight factoring process, imagine the following scenario:
Tom’s Trucking is a refrigerated freight company that uses altLINE to factor its invoices. The business sends an invoice for $75,000 to one of its clients after completing a route.
The freight factoring process would look as follows:
|Initial Cash Advance (Example: 95%)
|Factoring Fee (Example: 2%)
|Remaining Owed to Tom’s Trucking
|Total Received Once Invoice Is Paid
Once Tom’s Trucking submits its $75,000 invoice for factoring, altLINE advances the company 95% of the invoice value ($71,250).
Once the customer has submitted invoice payment to altLINE, we release the remaining cash to Tom’s Trucking, minus the factoring fee. In the example above, the factoring fee is 2% of the invoice value or $1,500, so Tom’s Trucking would receive $2,250 once the invoice is paid. At the end of the full transaction, Tom’s Trucking would ultimately receive $73,500 of the $75,000 invoice in exchange for a short-term working capital boost and accelerated cash flow.
Benefits of Invoice Factoring for Trucking Companies
Working with a freight factoring company can have a lot of benefits. Whether you’re a new owner-operator that only runs one truck or a seasoned transportation professional with a large fleet, freight bill factoring can help you run a successful business.
Here are some benefits you can get from freight factoring:
Get Your Invoices Paid In Days, Not Months
The most commonly talked about benefit of freight factoring is the speed at which you can access cash. It’s no secret that customers can take a long time to pay their invoices; in fact, a study shows that 49% of all invoices from companies in the US become overdue.
Freight factoring addresses this problem head-on by enabling truckers and owner-operators to sell their unpaid invoices to receive cash upfront. Instead of waiting for customers to pay their outstanding freight bills in 2-8 weeks, you can submit your invoices for factoring and access cash in a matter of days.
Access Capital to Grow Your Business While Maintaining Equity
As an owner-operator, you sometimes have to sacrifice business equity to capitalize on growth opportunities, but with invoice factoring, you do not have to give up a part of your business to access funding. Instead, factoring companies for fleet owners provide cash advances to help you hire more drivers, upgrade your equipment, and pay down debts, without sacrificing equity.
Take the Guesswork Out of Payments
Late invoice payments and delinquent customers make planning your finances and paying your drivers difficult. Truck factoring provides cash when you need it, so you don’t have to plan around unpredictable customer payments.
Get Help with Back Office Tasks
Managing a trucking company can be time consuming. In addition to finding loads and delivering shipments, you have to manage your finances, process invoice payments, follow up with customers, and track down delinquent accounts. By working with a freight factoring company, you can reduce the time you spend on back office tasks as the factoring company will step in to support.
Receive Customer Credit Checks
Because factoring companies only want to factor invoices for creditworthy customers, they perform customer credit checks before setting up a new account. This means that if you’d like to work with a new broker but are uncertain of their reliability, your factoring company can perform a credit check to help determine if they are worth partnering with.
Uses for Your Factoring Cash Advance
Receiving cash advances from a truck factoring company means you do not have to wait on customer payments to fund your business. With truck factoring, you can avoid long payment cycles, unlock growth capital, and accelerate business development.
Here are some ways you can use the funds you receive from truck invoice factoring:
Pay Your Drivers On Time
Paying truckers on time is essential to running a successful freight business. Unfortunately, slow and late customer payments can cause payroll delays that reduce productivity and employee satisfaction.
Factoring your trucking loads improves your cash flow, ensuring you meet payroll obligations on time – even when your invoices are not yet paid.
Take On New Customers
You don’t have to wait for customer payments to clear before spending money on fuel, equipment maintenance, and other transportation necessities. Factoring improves cash flow for your trucking company, enabling you to accept new loads and grow your business.
Pay Operating Expenses
Truck maintenance and insurance, among other fees, are essential operating expenses. Freight factoring lets you access working capital sooner rather than later, so you don’t have to dip into your savings, sacrifice equity, or sell assets to pay those expenses.
Run More Lanes
You should not have to wait for long invoice payment terms to hire more drivers and move more freight. Instead, invoice factoring for trucking enables you to turn unpaid invoices into cash, giving you the freedom and flexibility to grow your team.
Because freight factoring is not a loan, you do not have to worry about going into debt to pay expenses. Instead, you can focus on improving your credit by accessing working capital from factoring to pay down other debts, make timely payments, and build your business credit.
Related: Can You Factor with Bad Credit?
Freight and Trucking Businesses We Fund and Finance
altLINE is a freight factoring company that serves various businesses in the freight and transportation sector. Here are some types of businesses that can benefit from invoice factoring:
- General freight carriers
- Dump truck operators
- Logistics companies
- Cold chain transportation companies
- Courier services
- Vehicle towing services
- Flatbed trucking
- Refrigerated freight
Trucking Invoice Factoring vs. Other Funding Options
In addition to invoice factoring, there are multiple other options to fund your trucking company. Here are three alternative financing methods for truckers and how they compare to truck factoring:
Freight Factoring vs. Bank Line of Credit
A bank line of credit is often the first choice for trucking businesses looking for a financing solution. While many companies can qualify for a line of credit, they may not get enough funds to fuel significant growth.
Banks usually look at your fixed assets before approving your line of credit. A bank line of credit can be advantageous for trucking companies with many fixed assets because they can access higher lending limits. However, you may have a tougher time qualifying if you’re a new company without much in the name of assets.
If you’re a new business, invoice factoring is typically a better option. This is because truck factoring companies prioritize your customers’ credit histories when it comes to determining funding eligibility. If you work with an established and creditworthy customer base, factoring companies will likely provide the working capital that banks cannot.
Freight Factoring vs. Quick Pay
Quick Pay is a payment option offered by many brokers in the trucking industry. With Quick Pay, a trucking company can receive payment for its delivered load in 1-7 days, rather than waiting for the customer to pay in 15, 30, or even 90 days.
Many truckers find themselves debating between using factoring and Quick Pay. While Quick Pay can offer similar benefits as factoring, such as receiving payments in a matter of days rather than weeks, it is less flexible than freight factoring. Because brokers only offer Quick Pay for their own loads, the scalability of this payment method is limited. Additionally, Quick Pay only comes with the benefit of receiving payment early, while freight invoice factoring provides extra benefits, such as invoice management. Quick Pay and freight factoring are usually comparable in price and pay out in just a few days.
Freight Factoring vs. ACH Loans
Automated clearing house (ACH) loans are popular because funds are typically provided within 1-2 days. Additionally, you only need business bank statements to qualify.
However, the ease and speed of ACH loans are offset by their high interest and lender fees, which can reach up to 60% of your original loan. ACH lenders typically also offer loan stacking options that may lead to mountains of debt.
Invoice factoring is regarded as a safer option because your customers will eventually pay their bills, thus repaying your cash advance. This means you can focus on growing your business without stressing over debt repayments.
Typical Freight Factoring Rates and Fees
How much do factoring services cost for trucking companies? Here at altLINE, we determine truck factoring rates based on how much you plan to factor and how long your customers take to pay. Generally, we offer lower factoring rates when you factor more amounts and have reliable paying customers. We also consider other things like your company’s age and overall customer credit profile.
Factoring fees for trucking operators generally fall into two categories:
- Initial fee: This fee covers invoice processing for a set initial period of time (typically the first 30 days) and costs 0.50-3.50% of your invoice value.
- Incremental fees: These periodic fees kick in after the initial fee period to cover our additional expenses and costs 0.25-1.50% of your invoice value per charge.
In general, you can expect to pay 0.25-5% of the invoice value in freight factoring fees.
Requirements to Apply for Trucking Factoring
You must apply for factoring services to be eligible for a cash advance. Here are the documents you need:
List of Existing and Potential Customers
We require a list of all your existing and potential customers as part of the application. altLINE uses this to review your customers’ credit profiles and determine their eligibility for factoring.
We require you to complete a form as part of the trucking factoring application process. You will need to enclose these documents alongside your application:
- Business ownership identification
- Personal identification
- Employer Identification Number (EIN)
- Customer contracts
- Articles of incorporation and other relevant corporate documents
Accounts Receivable Aging Report
An accounts receivable aging schedule lists all of your outstanding invoices by due date. Factoring companies for truckers need this report to determine factoring fees and eligibility.
altLINE will consider invoices that are 30 to 90 days outstanding, but invoices for customers who say they cannot pay may be ineligible for factoring.
Give altLINE a Call
If you are unsure if factoring is the best option for your freight company, our representatives are happy to discuss the option further to help you make the best decision for your business.
Freight Factoring FAQs
Here are some common freight factoring questions about our factoring process, answered:
Is freight factoring a debt or loan?
Freight factoring is neither a debt nor a loan. Rather, invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers.
Do you require UCC filings when factoring trucking invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (the invoices) that we plan to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all trucking company owners. However, there are no minimum credit thresholds for approval, as the credit history of your customer is more important to us.
Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often work with the borrower to identify a trucking factor that is willing to help.
Do you offer non-recourse trucking factoring?
altLINE only offers recourse trucking factoring at this time. While you must repay the cash advance if your customer fails to pay, recourse factoring structures allow for factors to extend lower rates and larger credit limits on your customers.