Freight Factoring 101: What You Need to Know

If you work in the trucking industry as an owner-operator or you own your own small fleet of trucks, you are likely well aware of how fast the bills pile up and how slowly many customers tend to pay their invoices. Freight factoring allows you to turn those unpaid invoices into cash flow that will cover your bills even if your customers take months to pay their invoices.

What is Freight Factoring?

Freight factoring is an alternative financing strategy that allows certain businesses that utilize invoices to turn over their accounts receivable to a financial company that offers freight factoring, also called “factors.” This process is sometimes referred to as “accounts receivable financing.”

In the trucking industry, freight factoring is beneficial because it allows owner-operators or small-fleet owners to receive payment immediately for the work they have completed instead of waiting on payment of an invoice. This is beneficial due to the fact that it allows owner-operators and small-fleet owners to close their cash flow gap. Customers take weeks, often months, to pay their invoices. Utilizing factoring allows owner-operators to get paid for their services immediately, freeing them up to take on additional loads.

How Does Freight Factoring Work?

One of the biggest reasons that owner-operators and small-fleet owners choose to utilize freight factoring is due to the straightforwardness of the process itself. It is comprised of just four simple steps:
1.You or one of your drivers delivers their load to the customer as they usually would.
2.After delivery, submit a copy of the freight bill along with proof of delivery to the company you have chosen to work with for freight factoring. Typically, these documents can be sent in digitally. The freight factoring company will verify these documents. The freight company will be prompt and timely in their verification.
3.Once the invoice is verified by the freight factoring company, the company will provide you with a cash advance. Depending on varying circumstances, the advance will be up to 98% of the total invoice amount. Many companies offer a cash advance on the same day the invoice is submitted, as long as it is submitted by a certain time. Funds from the invoice advance are delivered in a variety of ways, with each company specifying its fund delivery process prior to working with you.
4.The freight factoring company will then work with the customer to collect on the original invoice. The factor then assumes all the responsibility of handling the collection process. This leaves the owner-operator or owner of a small fleet of trucks free to focus on the day-to-day of their current business, rather than focusing on collections.

Is Factoring Acceptable?

Decades ago, factoring was seen as bringing in a “tough guy” to strong-arm clients into paying invoices. Today, factoring has become completely acceptable due to the fact that banks and lenders now realize larger companies may take months to pay their invoice, but they will pay eventually. They understand that there is a stop-gap between trucking services and the payment of invoices by the companies whose services are provided to.
Banks and lenders now realize that it isn’t feasible for any owner-operator or small-fleet owner to be expected to cover those gaps while they wait to be paid by their customers. This knowledge has made freight factoring one of the most popular ways to finance transportation fees in the trucking industry today for owner-operators or small-fleet owners.

What Are the Benefits of Freight Factoring?

There are many reasons that factoring freight invoices is highly appealing to owner-operators and small-fleet owners. A few of the most important reasons include:
Closing the Cash Flow Gap: Factoring allows truckers to receive immediate access to funds for the load they just delivered. They don’t need to wait weeks or months for the customer to pay their invoice and remain stuck in the lurch for funds to pay bills and complete day-to-day business.
High Cash Advances for Invoices: The majority of freight factoring companies will advance 90% or more of the initial invoice upon approval of the invoice and delivery confirmation. Many even provide fuel advances.
Fast Approval: The majority of freight factoring company approve an owner-operators application within one business day.

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About the author: Wifred Murray

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