At its most basic level, a freight invoice is a piece of paper the receiving party signs when you deliver a load. Their signature indicates they have accepted the load and intend to pay the trucking company or owner-operator for transporting the cargo. Unfortunately, after the paper is signed, receiving an actual freight payment may take anywhere from a week, if you’re lucky, up to several months. But you have a business to run, and you can’t afford to wait sixty or ninety days for that load you delivered last night. In addition, you have bills coming due, and you still need fuel to deliver your next load, not to mention something to eat. Factoring companies exist to close the distance between completing a load and getting paid for it.
What is Factoring in Trucking?
Factoring is a way for truckers to receive much faster payment for their services. In contrast, the factoring company deals with invoice payment processing and collection. In exchange for this service, the truck driver gives up a small percentage of the invoice to the factoring company. Additionally, factoring companies typically charge additional fees for their service, reducing the amount you earn on that load. Still, drivers are willing to make the exchange for keeping their wheels turning.
How Does a Factoring Company Work for Truckers?
Factoring is a process where you sell your load invoice to a company specializing in collecting and processing Accounts Receivable. Usually, the factoring company will pay you nearly the entire earnings of the load within a few days. Still, in exchange for the service, they collect a percentage of that amount as a fee. From there, the invoice is off your hands, and you’re free to keep on running with money in your pocket while the factoring company deals with collecting the invoice.
How Do You Qualify For Factoring?
Factoring is a normal business procedure in the trucking industry. Qualifying for factoring is easy and straightforward. You need to own a trucking company, this includes working as an owner-operator, and you need to provide services to customers with good credit. And that’s all it takes to qualify.
Your financial condition and credit score are not taken into consideration. Approval is based on your customer’s credit rating, as they are the party responsible for making the payment.
Since the burden for qualification is on your customer, there’s little to nothing for you to do beyond the decision to use factoring.
However, if a customer does not qualify for factoring, you must decide if you will make other payment arrangements, or decline to provide them service. In this regard, factoring works as a protection for you. The last thing you want is to transport a load for a customer who has a record of not paying on time, or at all. In that sense, factoring is a reliable way to vet your customers and protect your business.
What Are the Steps of the Factoring Process?
- The trucking company or owner-operator starts factoring with a factoring company.
- The trucking company notifies their customers about the factoring arrangement. Most customers are accustomed to the factoring arrangement as it is quite common in the industry.
- Driver transports the load for the customer, makes the delivery and receives a signed invoice.
- The driver then sends a copy of the invoice to the factoring company.
- The factoring company must verify the invoice to ensure the load has been delivered according to the terms of the contract.
- The factoring company advances the driver a percentage of the invoice’s value within a few days of receiving the invoice.
- The driver can receive up to 98% of the original value of the invoice.
- The factoring company takes over the billing process and collects from the customer.
Why Do Companies Use Factoring?
Many companies use factoring because, in the trucking business, you need your cash flow to operate today, not three months from now. The small percentage of load value you give up in exchange for faster payment is just a small price compared to all other business-related costs to cover.
Recourse vs Non-recourse Factoring
One set of terms you’ll run into if you choose to call upon the services of a factoring are recourse and non-recourse factoring. Knowing the difference between the two will impact how much you stand to gain, or potentially lose if you decide to use a factoring company. Let’s take a look:
Recourse Factoring: Companies that offer recourse factoring take a lower percentage cut which means more money in your pocket. But there’s a catch. If they are unable to collect payment from your customer, you are required to buy back the invoice. That’s a bad situation to be in when you have cash flow to maintain. And chances are, if the factoring company couldn’t collect on the invoice, you’re going to be left unpaid for the load for no telling how long.
Non-recourse Factoring: Companies that offer non-recourse factoring seem like pretty nice guys compared to the alternative. With this type of factoring if the customer doesn’t pay, you won’t be held liable for repaying the invoice. Again, there is a catch. With non-recourse, the factoring company takes a substantially larger cut of the invoice’s value. That leads to a smaller pile of cash for you but a little less is better than the “you have to pay us the entire amount back” prospect offered with recourse factoring.
Do I Need a Factoring Company To Be Successful As An Owner-Operator?
You can run your trucking business perfectly fine without the services of a factoring company. Of course, you will have to plan for the lengthy wait times on getting paid by your customers, but you won’t be out the fees and percentage cut taken by a factoring company. Ultimately, factoring is a quality-of-life upgrade for a price, and many owner-operators have successfully used factoring.
At CloudTrucks, we have developed a better way to give you payment on demand. Every driver who signs up with CloudTrucks is eligible for our CT Cash card. You will receive instant payments for a much smaller fee than any factoring company. In addition, owner-operators receive additional perks such as:
- The ability to operate under our MC authority with Virtual Carrier or on your own with our Flex program.
- Access to our Lease-to-Own program
- Help with license plates.
- Access to 24/7 backend office support
- The CloudTrucks Schedule Optimizer
- The freedom to choose your loads and control your schedule
Step into the future of trucking and sign up with CloudTrucks today. To compare plans, head over to our pricing page.