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Independent truck owner-operators and small trucking companies can face the problem of getting paid for their work: The problem isn’t whether they’ll collect the money owed them, it’s when. A trucker might have to wait 30, 60 or even 90 days for its customers to pay the invoices for delivered loads. To keep the cash flowing during the waiting period, many small trucking businesses, and even large ones, turn to freight factoring, in which a finance company advances most of the invoiced amount in return for a fee. In this article, we’ll explain how a small trucking business uses freight factoring (the process for large truckers is a little different), including the rates and terms of factoring agreements, how to qualify for freight factoring and where to get it.
How Does Freight Factoring Work?
In a freight factoring arrangement, a trucking company will receive an advance on an unpaid customer invoice from a financing company. Most independent truckers—individuals and small companies—haul loads from either a single shipper or from a collection of shippers and brokers who list their available loads on websites like DAT TruckersEdge. The trucker will accept the assignment, pick up the load, deliver it and invoice the shipper or broker. The invoice remains open on the trucker’s accounts receivable until paid. Freight factoring firms cut the payment waiting time by providing cash advances based on a trucker’s accounts receivable.
The process works this way:
- 1. Application: A trucker applies to a freight factor company (the factor) to receive advance payments.
- 2. Setup: Once accepted, the factor and truck link their accounts receivable software so that the trucker can select and submit invoices to the factor.
- 3. Submission: The trucker submits some or all of its invoices to the factor.
- 4. Cash advance: The factor pays the trucker a large percentage—generally 85% to 90%—of the invoice’s face value the next day and the remainder when the shipper or broker pays. In some cases, the factor might pay the entire invoice amount upfront.
- 5. Fee payment: Fee payment generally works in one of two ways: In one scenario, the financing company will pay the trucker the remaining balance on the invoice, less fees, once the customer pays the invoice. Alternatively, the factoring arrangement can work more similarly to a line of credit. Every week, the trucker pays fees and repays principal to the factor based upon the balance of unpaid invoices.
For example, an independent trucker submits unpaid invoices with a total face value of $10,000 to a freight factor companying and is paid $9,500 the next day, based on the factor’s advance rate of 95%. Once the customer pays the invoice, the trucker will receive the remaining $500 on the invoice, minus fees from the factor. Fees generally accrue on a weekly or monthly basis but are taken as a lump sum from the remaining balance.
In the weekly repayment scenario, the trucker pays $2,000 of the advance and a fee of $47.50, which is 0.5% of the previous week’s balance of $9,500, the next week. The week after, the trucker pays another $2,000 of the advance and 0.5% of the remaining $7,500 balance, or $37.50. The process repeats until trucker repays the full $9,500, at which point the factor sends the trucker the remaining $500 of the invoice’s $10,000 total face value. If truckers repay the balance sooner, they will save money on fees.
Freight Factoring Rates and Terms
The following table lists the typical rates and terms for small-trucker freight factors. For larger operations, trucking companies can finance upward of $10 million to $20 million per month through freight factoring.
|Amounts funded||$1,000 – $100,000 per month|
|Advance rate||85% – 100%|
|Discount rate||0.5% – 5.00% per invoice|
|Invoices accepted||Due within 90 days|
|Time needed to qualify||1 – 2 days|
|Time needed to fund||1 day|
|Repayment frequency (line of credit)||Weekly|
|Repayment time (line of credit)||12 – 24 weeks|
|Required accounts receivable software||About 10 choices, including QuickBooks and Freshbooks|
How to Qualify for Freight Factoring
An unusual characteristic of freight factoring is that factoring firms are more interested in the credit of the truckers’ customers rather than the truckers’. After all, it’s the truckers’ customers, which are usually shippers and brokers, who will pay the invoices. That means you are most likely to qualify if your accounts receivable shows a steady record of consistent cash flow and excellent likelihood of payment. The trucker or business owner will need to have a credit score of at least 530, have a history of on-time payments and have a business that has been in operation for at least three to six months. The longer your accounting history, the easier it is to be approved by a freight factor. Invoices must have a due date within 30, 60 or 90 days.
Where to Get Freight Factoring
Freight factoring companies are nonbank finance companies. Well-known companies in this segment include Fundbox, Thunder Funding, ENGS Commercial Finance, Oak Hill Capital Corp. and Factor Finders, but there are at least a dozen more. If you are a larger trucking company, you might want funders that offer high-volume freight factoring (more than $30,000 per month), such as BlueVine or Interstate Capital. Another item that may influence your decision is fuel financing. Some freight factors will extend you credit to pay for fuel for your trucks, although a fuel card might be a less expensive alternative.