What to consider when choosing a freight factoring company

As an owner-operator or small trucking company business owner in the transportation industry, you're likely familiar with the challenges of maintaining steady cash flow. With long broker payment terms taking 30, 60 or up to 90 days to pay invoices, it can be tough to cover immediate expenses like fuel, maintenance, and payroll. This is where freight factoring comes in as a crucial financing option and cash flow solution.

What is Freight Factoring?

Freight factoring is a financial service that allows trucking and logistics companies to sell their outstanding invoices to a factoring company for a cash advance or access to capital, typically within 24 hours. This solution addresses the notoriously slow payment cycles in the transportation industry, providing truckers with the working capital they need to keep their wheels turning.

But with numerous factoring companies out there, how do you choose the right freight factoring partner for your business? Let's dive into the key factors you should consider when selecting a freight factoring company as well as the benefits of freight factoring.

Key factors in selecting a freight factoring company

Assessing industry expertise and reputation

When entrusting your invoices to a factoring provider, you want to ensure they have a solid understanding of the trucking industry and a strong reputation. In addition to knowing the company's freight factoring services, it’s important to research their reputation in the industry. Key things to look for are customer reviews, industry experience and accreditations.

For new carriers (new authorities):

• Read online reviews/testimonials and check for complaints on trusted platforms.

• Ask for recommendations from other carriers in your network.

• Look for companies with a long history or extensive experience of serving the freight industry.

For existing carriers (existing authorities):

• Reassess your current provider's reputation regularly.

• Ensure they're still aligned with industry best practices and your evolving needs and business model.

Pro Tip: Check if the factoring provider is a member of reputable associations like the Transport Alliance or the American Trucking Association (ATA).

Types of factoring: recourse versus non-recourse

Understanding the difference between recourse and non-recourse factoring is crucial for managing risk.

• Recourse Factoring: You (the carrier) are responsible if the broker doesn't pay.

• Non-Recourse Factoring: The factoring company assumes the risk of non-payment, but at a higher cost.

For new carriers:
Non-recourse factoring may provide peace of mind as you build your client base.

For existing carriers:
Evaluate if your current factoring arrangement matches your risk tolerance and financial stability.

Understanding Factoring Rates, Fees, and Costs

What is a factoring rate?

A factoring rate (also known as a factoring cost) is the fee charged by a factoring company for their services, typically expressed as a percentage of the invoice value. It's essentially the cost of the factoring service. Rates typically range from 1% to 5% of the invoice value, depending on various factors:

• Volume of invoices being factored

• Creditworthiness of your customers (the shippers or brokers)

• The age of the invoices

• Your company's financial health and time in business

• Whether it's recourse or non-recourse factoring (non-recourse usually has higher rates)

Transparency in factoring fees and costs

Understanding the cost structure is crucial to ensure factoring remains beneficial for your business.

Key points to consider:

• Flat Rate vs. Variable Rate pricing: Some companies offer flat rates regardless of how long it takes to collect the invoice. With others use variable rates that increase the longer an invoice remains unpaid. Look for clear, easy-to-understand pricing structures.

• Hidden fees: Be wary of additional charges like application fees, transaction fees, wire fees, processing fees or ACH fees.

For new carriers:
Aim for competitive rates, typically less than 5% of the invoice value and focus on companies offering straightforward pricing with no hidden fees (e.g., transaction fees, wire fees, or ACH fees).

For existing carriers:
Review your current agreement, rates and terms and consider renegotiating if fees have become ambiguous or excessive. Or consider switching factoring companies. Some might find better options that offer quicker payouts or smaller factoring rates.

Advance rates

The advance rate is the percentage of the invoice amount that the company will provide upfront. Higher advance rates can significantly impact cash flow. Standard Rates or what most companies provide is an advance rate between 70% and 90%. Determine where the factoring provider stands and what it means for your cash flow management.

Contract flexibility

The terms of your factoring agreement can significantly impact your operations. Review the contract terms and carefully consider the following:

Key considerations:

• Contract length: Look for companies offering flexible terms or no long-term commitments. Length of factoring Contract: Are you locked into long-term contract agreement, or can you cancel easily?

• Termination fees: Understand the costs associated with ending the agreement early.

• Minimum volume requirements: Ensure any volume commitments align with your business capacity.

For new carriers:
Start with short-term or flexible contracts as you grow your business.

For existing carriers:
Review your current terms to ensure they still serve your needs and allow for business growth.

Funding Speed

Cash flow is king in the trucking industry, so consider how much and how quickly you'll receive funds. Look for companies offering same-day or next-day funding after invoice submission.

For new carriers:
Prioritize higher advance rates and quick funding to cover startup costs like fuel, insurance, and maintenance.

For existing carriers:
Compare your current factoring partner's rates and speed with competitors to optimize your cash flow.

Assessing customer service support

Responsive and helpful customer service can make a significant difference in your factoring experience. How do they handle disputes or delays? Are they offering what you would consider excellent customer service?

Availability of support during business hours

• Accessibility: Determine how easy it is to reach customer support.

• Dedicated account managers: Responsiveness from a specific contact can make communication much more effective.

• Transparent communication: A trustworthy factoring partner will provide clear, upfront explanations regarding processes, fees, and any additional charges associated with your account. A well as have multiple communication channels (phone, email, chat)

• Smooth customer payments: Ability to efficiently process and manage invoice payments, ensuring a seamless and professional experience that maintains good relationships and minimizes payment delays or disputes.

For new carriers:
Prioritize companies with robust support systems to guide you through your first year.

For existing carriers:
Evaluate if your current provider meets your expectations or if it's time to switch to a more customer-centric partner.

Back-office support services

Freight factoring companies often offer more than just invoice factoring. Consider:

• Additional financial services, fuel cards and other benefits (credit and load advances): Some companies provide services such as fuel advances, equipment financing, or credit checks for their customers. Many factoring companies offer perks like discounted fuel card programs, line of credit, or load board access. For new carriers, these additional benefits can reduce operating costs. Existing carriers should assess if they’re already taking full advantage of any extra services.

• Robust broker directory: Many factoring companies provide credit checks on brokers to help you avoid risky clients. New carriers should prioritize companies that offer robust broker credit score to minimize risk. Existing carriers should evaluate if their current factoring partner provides accurate and timely credit insights.

• Technology integrations: Does the company offer a user-friendly portal for submitting invoices and tracking payments? Look for companies that simplify the factoring process and make it easy to factor and manage your entire companies invoices to ease the heavy administrative work. New carriers should look for easy-to-navigate systems reduce administrative headaches and existing carriers should look for technology that will help their growing business.

Conclusion: Enhancing business financial health through choosing the right partner

Choosing the right freight factoring company is an important decision that can affect your trucking or logistics business’s cash flow and overall efficiency. By considering aspects like reputation, fees, funding speed, customer service, and more, you can sparse through trucking factoring companies and select a partner that will support your growth and financial stability. Take the time to research various factoring companies, compare their offerings, and make an informed decision that aligns with your business needs.

TruckSmarter Factoring

At TruckSmarter, we believe that our factoring relationship with our carriers is a partnership. From offering market-competitive factoring rates of less than 3%, payments within 30 to 60 minutes, flexible contracts, and no hidden costs, monthly minimums or maximums to factor with us. We are constantly working, innovating, and communicating with our users to make sure we are offering a driver-first, non-recourse, factoring service that guarantees faster access to cash. Check us out to learn more about our additional services for factoring users (fuel discounts, interest-yielding checking accounts and more).