A Complete Guide to Freight Factoring for Trucking Companies

Let’s face it, running a trucking business isn’t a walk in the park. While becoming an owner-operator can really pay-off in the long run, this is an industry known for long payment terms and hefty operating costs. These constant challenges make it difficult to maintain enough working capital to keep operations running smoothly, which is why many trucking business owners turn to a financing solution called “freight factoring.”

Freight factoring is one of the most popular trucking business financing options. If you’re a first-time business owner, there’s a chance you’re unfamiliar with this solution as it’s not quite as well-known as a traditional bank loan or line of credit. However, freight factoring for trucking companies has proven to be just as if not more effective than your standard loan.

This article on freight factoring for trucking companies will highlight how the process of factoring works, what a freight factoring company does, the benefits of this financing solution, and common FAQs about factoring in the trucking industry. By the end of the piece, you’ll be able to determine if your trucking business is a good fit for freight factoring.

Continue reading for a full breakdown on everything you need to know about freight factoring.

What Is Freight Factoring?

Freight factoring, sometimes referred to as “load factoring” or “freight bill factoring,” is a subset of invoice factoring, which is a popular alternative financing solution for small business owners. Through invoice factoring, business owners can sell their outstanding accounts receivable to a third-party factoring company (also known as a “factor”) in exchange for an immediate cash advance. Invoice factoring is available for use across many industries, but freight factoring is specifically tailored toward trucking business owners looking more for consistent, reliable cash flow and quick working capital boosts.

How Does Freight Factoring Work?

Freight factoring can be best described as trucking companies selling their unpaid invoices for cash, allowing them to get paid for their work much quicker.

Here’s and overview of how the freight factoring process works:

1. After contract details are ironed out and approved, you can get to booking loads as you normally would. When finding loads, you’ll still need to get a rate sheet, and both parties will have to sign a Bill of Lading (BOL).
2. Send the rate sheet and BOL to your factoring company.
3. Complete the haul and send the invoice to your respective freight broker or shipper and factoring company.
4. Once you’ve sent the invoice, your factor will immediately advance your business the near-full invoice amount.
5. Your broker or shipper submits payment to the factoring company, with timing depending on your payment terms (usually 30 to 90 days later).
6. Once the invoice is paid in full, your factoring company will release the remaining invoice value to you, minus a small factoring fee.

You can see why freight factoring is so popular for small trucking businesses. Net 30 to net 90 payment terms leave business owners waiting weeks to even months for payment, which can be hugely detrimental when you’re operating on a tight budget. With freight factoring, this cash is advanced within 24 hours of invoicing your client!

What Does a Freight Factoring Company Do?

Trucking factoring companies buy businesses’ invoices and advance the near-full amount of the invoice to trucking companies who don’t want to wait for their clients to pay, since the payment process in the trucking industry can take months. The main goal of a freight factoring company is to help improve their customers’ (your business’) cash flow.

In addition to buying outstanding accounts receivable, freight factoring companies are responsible for collections for all invoices that have been factored, taking a significant amount of accounting responsibilities off their plate.

Freight factoring companies even perform free credit checks on owner-operators’ business partners. While they do this with the intent to ensure those brokers or shippers can be relied upon to pay their invoices, it’s actually another reason why many trucking businesses appreciate working with factoring companies. The credit check ultimately benefits the trucking business too, as it reveals whether or not it would be wise to continue to work with the respective broker or shipper.

Factoring companies can do more on a case-by-case basis as well. Representatives from a good factoring company will work hand-in-hand with owner-operators to make the onboarding process as smooth and straightforward as possible, answering any questions or concerns throughout the partnership.

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Benefits of Factoring Your Trucking Invoices

The benefits of freight factoring vary by trucking business based on their needs and intentions behind factoring their invoices. For instance, one might look into factoring because they’re in a constant cycle of negative cash flow, while another might simply want a third-party to shoulder some of their accounting load to take some work off their plate.

Regardless, it can be costly to operate and grow a trucking business as a new owner-operator. That’s why securing a reliable trucking financing solution for your business is so pivotal. A funding partner can be the difference between whether or not you reach your growth goals.

With that being said, below are some of the most common benefits of factoring invoices.

Get Paid More Quickly

The most straightforward benefit of freight factoring is that it allows owner-operators to get paid quicker. Instead of waiting 30, 45, 60, or even 90 days for their business partner to pay for the services provided, companies that factor their freight bills are paid almost instantly – within 24 hours of submitting an invoice for funding.

And you won’t only be free from waiting to get paid. You also won’t have to worry about being at home to collect physical checks for your load deliveries – instead, you can opt for an ACH or wire transfer to get access to funds while on the road. Given truckers spend so much time away from home, this is a unique perk.

Improves Cash Flow

Getting invoices paid quicker improves cash flow for your trucking business. This is a critical benefit for small trucking businesses as 60% of small business owners have highlighted cash flow issues as one of their most pressing challenges.

Enables Growth

The cash flow boost from freight factoring helps trucking business owners reach their growth goals. For example, maybe you want to expand your business operations, but the additional operating expenses are too risky to take on since you never know when your brokers or shippers are going to pay.

This is where the cash flow predictability that freight factoring provides would especially come in handy. It allows you to take on that new customer, hire that new driver, or cover those operating costs because you know exactly when you’re going to be paid.

Helps New Trucking Companies and Owner-Operators Get Off the Ground

Perhaps the most difficult aspect of starting a trucking business is how to finance your venture. The costs of starting a trucking business might be more than you think, so even that money you’ve saved might not be enough to give yourself the stability you want or need.

Many aspiring owner-operators find that asking friends and family for initial funding can be awkward, and an even more challenging roadblock can be the fact that first-time business owners often can’t qualify for standard bank loans due to a lack of credit history. Therefore, alternative lending options like freight factoring can be the perfect solution. Low or nonexistent business credit score? No problem – you can still qualify. Lack of collateral? The only collateral required are the invoices themselves.

Freight factoring is an attainable financing option to kickstart most trucking companies, especially as a solo owner-operator. Otherwise, you might have to wait years to save up enough money to fund your startup trucking business.

Provides Back Office Accounting Support

Your factoring company will assume collection responsibility for the invoices you factor. This is a welcome aspect of freight factoring for owner-operators who already have a lot going on. After all, you probably didn’t enter the trucking business because you enjoy accounting!

In addition to general collections, representatives from your factoring company can assist with other oversight responsibilities, ensuring invoices are paid in full, payment is processed successfully, and your customers aren’t engaging in any shady or fraudulent activity.

Helps Owner-Operators Avoid Debt

You might think, “if I use a financial institution to help fund my trucking business, won’t I have to repay those funds at some point?”

With freight factoring, the answer is no! Unlike other traditional financing options, freight factoring is not considered a loan. Remember, factoring is literally the sale of your unpaid invoices to a factoring company at a discounted rate, meaning you won’t have to worry about adding the funds you receive to your list of short-term or long-term liabilities.

Provides Client and Freight Broker Credit Checks

Not every funding method comes with a credit check on your business partners, but invoice factoring does. Many owner-operators appreciate that factors will perform a credit check on their existing and potential brokers and shippers to determine qualification.

One altLINE customer noted that the credit check on her customers was one of the best elements of factoring, saying, “The thing I like the most is that you credit check our potential clients before we start doing real business with them. We absolutely love that you’ve helped us figure which businesses we can do a lot of business with and which businesses to maybe limit business with. You’ve allowed us, or shown us, a safe zone in knowing which businesses are good businesses for us to work with.”

Factoring Is Not a Loan

Many owner-operators find that the most advantageous aspect of freight factoring is that it’s not actually a loan, Meaning, you don’t have to file all the invoices you’ve factored under your list of liabilities. You also don’t have to fork over collateral (aside from the invoices themselves). This is a perk that’s a rarity in the trucking industry, as the majority of financing solutions require significant collateral to be put up against loans, such as your truck, that you simply can’t afford to lose.

You Can Qualify for Freight Factoring Despite Bad Credit or Lack of Credit

Wondering about freight factoring requirements, such as a minimum credit score? Good news – this is a financing option known for easy, fast approval for borrowers.

Truck factoring is more accessible not because the lenders don’t do their due diligence but because they focus more so on the creditworthiness of your customers than of yourself. Because factoring companies purchase invoices that are awaiting payment by your customers – not your own trucking business – they want to ensure your customers are reliable debtors. Therefore, your customers’ credit scores, payment habits, and financial histories are more important to lenders than your own. As long as your customers have an above average business credit score and haven’t shown a pattern of poor payment behavior, such as consistently paying invoices late, there’s a good chance you’ll qualify for freight factoring – even if you possess a subpar credit score.

What You’ll Need to Qualify for Freight Factoring

By this point, you might realize that factoring freight bills could be a perfect solution for your business, so let’s take a look at what owner-operators need to apply and qualify.

Qualifying for load factoring isn’t quite as stringent as traditional business loans. In fact, it’s considered a no-doc business loan, which are loans (or other financing solutions) that require little to no documentation when applying. However, there are a few steps to the process, listed below.

Complete a Factoring Application

After you’ve filled out a quote form and spoken with a representative from a freight factoring company to ensure you’re a good fit, the first step is completing the freight factoring application. The following items are to be submitted:

• Business ownership identification
• Personal identification
• Employer identification number (EIN)
• Customer contract
• Articles of incorporation

List of Existing and Potential Customers Whose Invoices You Plan to Factor

Since lenders are relying on your customers to pay their invoices, they’ll need some information about them.

This is a good time to note that, if utilizing freight factoring services, you might be required to factor your whole ledger; though some factors will allow you to be selective with the invoices you sell for cash. A lot of this depends on whether or not you meet their monthly funding minimum.

Regardless, you’ll need to submit a list of your customers. A freight factoring company like altLINE will review your customers and perform a credit check on each of them to determine eligibility.

Accounts Receivable Aging Report

An accounts receivable aging report lists out all of your outstanding invoices by due date. Along with submitting a list of customers, owner-operators will pass this along to the factoring company, who will review aspects such as the length of payment terms and customer payment habits to determine freight factoring rates and fees.

An example of an AR aging report can be found below. It shows an account where 50% of customers are paying on-time.

altLINE will work with owner-operators who have outstanding invoices up to 30, 60, or even 90 days. However, customers have to show a willingness and ability to pay.

Factoring vs. Quick Pay

Factoring and Quick Pay are two of the most popular ways for owner-operators to accelerate cash flow and get paid more quickly. But what’s the difference between freight factoring and Quick Pay?

Overall, both options are aimed to improve cash flow for trucking businesses, but freight factoring services actually provide owner-operators with funds even faster (usually within 24 hours) than Quick Pay (usually 2 to 5 business days).

One main difference is that Quick Pay involves brokers fulfilling invoice payments, whereas with factoring, it’s a third-party factoring company advancing the value of each invoice, not a broker. Additionally, brokers can only offer Quick Pay for their own loads, while factoring companies can offer services for invoices from any broker or customer. This allows for greater flexibility. Plus, factoring companies assume collection responsibilities for all of the invoices factored, and they even assist with accounting-related tasks for those payments.

As you can see, freight factoring and Quick Pay can both assist new owner-operators with improving immediate working capital and cash flow. However, this is achieved in different ways.

Bank Factors vs. Independent Factors

The best factoring companies for truckers are commonly viewed as ones that are regulated, transparent, and fair. Factoring trucking receivables requires a bit of research and planning, particularly because there are two types of lenders that can fund your invoices: bank factors and independent factors.

Bank factors are almost always FDIC-insured, and they must abide by local and federal regulations. Independent factors are not affiliated with a bank, meaning they aren’t FDIC-insured and are far less regulated.

Independent factors might use third-party funds to finance your invoices, which can result in additional risk and higher factoring rates.

When factoring trucking receivables, it’s wise to partner with bank factors.

Freight Factoring Fees, Terms, and Funding Limits

Freight factoring fees, terms, and funding limits will vary by the factoring company. However, you should expect fees to be implemented such as a factoring fee, ACH fee, and early termination fee.

Here at altLINE, we determine freight factoring rates based on how much you plan to factor and how long your customers take to pay. Generally, we’ll offer lower factoring rates when you factor higher amounts and have customers that have a history of paying on-time. We also consider other things like your company’s age and overall customer credit profile.

In general, you can expect to pay 0.90-3.50% of the invoice value in freight factoring fees.

How to Determine If Your Trucking Company Is a Good Fit for Freight Factoring

Theoretically, any trucking business struggling with negative cash flow or insufficient working capital that qualifies could greatly benefit from factoring their loads. But there are some trucking operators that may be a better fit than others.

Solo owner-operators who are still in the startup or small business phase of their company can be a perfect fit for factoring freight bills. Many of these startup trucking business owners cannot qualify for traditional bank loans due to factors that are often out of their control, such as insufficient credit history or revenue. Since freight factoring eligibility isn’t solely determined by aspects such as credit score or business revenue, it becomes an ideal alternative.

Trucking business owners who are looking to fund expansion efforts can also greatly benefit from factoring their invoices. Unlike most lending solutions, factoring doesn’t require collateral (aside from the invoices themselves). This means that trucking companies in the growth phase don’t need to sacrifice valuable equipment, trucks, or other assets in order to receive funding assistance. Additionally, factoring scales easily, so as you take on more loads, you can seamlessly increase your financing capacity.

Alternatively, large, established trucking businesses may have needs that surpass funding limits enforced by most trucking factoring companies. These larger businesses, with increased financial needs, might have to turn to more traditional options with higher limits.

Freight and Trucking Businesses We Fund and Finance

altLINE is a trucking factoring company that serves various businesses in the freight and transportation sector.

More specifically, here are some types of businesses that can benefit from our services:

• Owner-operators
• General freight carriers
• Dump truck operators
• Logistics companies
• Cold chain transportation companies
• Courier services
• Vehicle towing services
• Flatbed trucking
• Refrigerated freight
• Long-haul truckers

How Do Freight Factoring Contracts Work?

A freight factoring contract, or simply factoring agreement, is the final step of the application process. However, before signing on the dotted line, it’s important to understand how these contracts work and what you should look out for, along with a few tips to keep in mind. Remember, your factor will reflect as an extension of your business, so it’s critical to build trust with your provider in the early stages, which includes ample, clear communication regarding the ins and outs of your contract.

Know Your Obligations

It’s always important that you know exactly what’s to be expected of you before signing a factoring agreement. You’ll have to pay the small freight factoring and account maintenance fees to cover the work that the factor will do involving your accounts receivable for the foreseeable future.

Furthermore, while many factors won’t require you to include all of your outstanding AR in the agreement, you must be willing to submit information about your business and your clients to your factor. This will benefit your business, as the factor will work with you to understand your exact funding needs so that you’re not factoring too much or too little. Also note that most factors have a monthly minimum which you’ll be expected to meet. If you don’t meet the minimal threshold of invoices factored (in dollars), you could be met with a penalty fee. In the case you believe your agreed-upon monthly minimum needs to change, you can discuss with your factoring company and potentially renegotiate the contract.

Finally, if your customer or broker doesn’t pay the invoice, you may be held liable for the missing funds. This is why it’s critical to do your research into recourse factoring vs. non-recourse factoring. Both have their pros and cons, but the general difference between the two lies in who is responsible for unpaid invoices if your customer fails to pay.

Avoid Long-Term Freight Factoring Contracts

One major tip for owner-operators in the market for a factoring company is to keep an eye out for contracts that lock you in long-term. The standard freight factoring contract is 12 months. Shorter or longer contracts can be offered on a case-by-case basis, but if you’re offered a contract 2 years or longer, you should be given a valid reason or look for a shorter contract.

As a small trucking business owner, you don’t want to get locked into a contract that’s too long. Unexpected shifts in sales and revenue can happen to even the most successful owner-operators, so it’s crucial to avoid multi-year contracts in the case of major working capital changes for your business.

How to Get Out of a Factoring Contract

Early termination fees will be included in any factoring contract. These are necessary fees to protect the factoring company. Keep an eye out for the exact variables of an early termination fee to be outlined in your invoice factoring agreement.

Getting out of a freight factoring contract will involve different procedures on a case-by-case basis, depending on who you’re working with. Regardless of your situation, honesty and transparency is appreciated by any good factoring company.

The Importance of the Window of Notification Prior to an Auto-Renewal

Make clear the window of notification when finalizing your contract. This is the period of time where you can back out from a freight factoring agreement prior to it renewing without any fees or trouble.

If you’re in a position where you want to back out, you’ll need to do so within the window of notification or else the contract will typically auto-renew. This is often the date your contract was signed the following year (for example, if you sign a one-year contract on June 24, 2023, auto-renewal is June 24, 2024).

Four Questions to Ask Every Freight Factoring Company When Exploring Funding Options

Trucking factoring has proven an incredibly effective funding solution for owner-operators, but it’s vital to do your due-diligence before signing a contract. This involves knowing the right questions to ask.

You should know the answers to the following four questions when weighing top freight factoring companies against each other:

1. “Are You a Bank Factoring Company or an Independent Factoring Company?”

A bank factoring company vs. independent factoring company is a crucial distinction that you should make clear from the beginning of your communications with a factor. The differences between the two are significant.

For example, a bank factor like altLINE is FDIC-insured and heavily regulated at the local and federal levels. This means more reliable funding on your end, since it’s known where that money is coming from. An independent factoring company, on the other hand, typically isn’t nearly as regulated as bank factors. An independent factor’s funds often come from third parties, and since they aren’t as regulated, there can be less transparency in the factoring process.

2. “Will I Have to Factor My Entire Ledger?”

One aspect of a factoring agreement that differs between companies is whether or not you’ll be required to factor your entire ledger. This is often the case because a certain freight factoring company might have a monthly minimum that you would only be able to meet if you factored all of your invoices. Another company might have a lower minimum and allow you to factor select invoices.

3. “Do You Offer Recourse Factoring, Non-Recourse Factoring, or Both?”

There are two types of freight factoring: recourse factoring and non-recourse factoring.

If working on a factoring agreement with recourse, you will be held responsible for any funds that your customer fails to pay in the case of missed payment. With non-recourse factoring, the lender will be liable for any non-payments.

Most bank factoring companies implement recourse factoring. Confirm with your provider prior to signing a factoring contract, and read said contract thoroughly.

4. “What Are Your Monthly Minimum and Maximum Funding Limits?”

A freight factoring company is likely to have monthly minimum and maximum funding limits in place for their customers. It’s imperative that you know what these are before signing a freight factoring agreement. Failure to abide by the minimum can eventually lead to a penalty, or the eventual end of a factoring partnership.

Freight Factoring With altLINE – How We Can Help You Achieve Your Trucking Business Growth Goals

altLINE by The Southern Bank is a factoring company with more than 80 years of experience serving clients. We pride ourselves on our customer service, attention to detail, and transparency when working with business owners.

If you run a trucking company and need funding, you can fill out our free quote form or call one of our representatives at 205-590-9471 to get further details.

Even if you are unsure if load 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

Below are some of the most commonly asked questions about freight factoring.

Is freight factoring considered a loan?

No, freight factoring is not a loan. Freight factoring involves a third-party factoring company actually purchasing your invoices at a discounted rate. In return, trucking businesses are advanced the majority of each invoice’s value.

What are average freight factoring rates?

Average freight factoring rates will vary by factoring company. Generally, you should expect to pay 0.90-3.50% of the value of each invoice in freight factoring fees. The exact number will vary based on a few aspects, such as your brokers’ or customers’ creditworthiness, how much of your ledger you’ll be factoring, and the age of your business.

Do freight factoring companies perform credit checks on my customers?

Yes, freight factoring companies will perform credit checks on your brokers and customers. This is an essential step of the qualification and onboarding process. A credit check mitigates risk for factoring companies, ensuring they aren’t buying invoices with payments owed by unreliable customers who regularly fail to pay for goods or services.

How do you switch factoring companies?

Switching factoring companies isn’t always a simple undertaking. The simplest way to do so is by notifying your existing factoring company before your window of notification ends and your contract is auto renewed.

If you’re looking to switch factoring companies immediately, however, things can get more difficult because you cannot work with two factoring companies at once. If you must switch factors immediately, this will likely prompt an early termination fee. But if you find better pricing elsewhere with a better level of service, or perhaps increased industry knowledge, this could be worth it. Before ending a factoring agreement, it’s best practice to be transparent with your provider to discuss options.

What is the difference between recourse and non-recourse factoring?

With recourse factoring, the business utilizing a third-party factoring company’s service is responsible for any customer non-payment. With non-recourse factoring, the factoring company is financially responsible for the lost funds in the situation in which a customer fails to make payment.

What are some of the most common trucking business funding options for new owner-operators?

For owner-operators needing immediate funding, some of the most popular options include freight factoring, accounts receivable financing, equipment financing, and business lines of credit. Freight factoring is a common solution for new owner-operators, as qualification isn’t wholly dependent on creditworthiness, revenue, or collateral.

How do owner-operators use their cash advances from factoring?

Owner-operators can use their freight factoring cash advances in many ways! Some use it to hire more drivers, others use it to pay overhead costs, while others use it for business expansion purposes.

Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.