Freight Factoring Explained

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Did you know that US trucking industry revenues exceeded $700 billion in 2022 and moved over 69% of all goods from the US to Mexico?

Whether you’re new to the industry or have been in business for a while, it’s essential to look for new ways to grow your business and improve your cash flow. If you haven’t looked into freight factoring, then you’re missing out.

To learn more, keep reading this guide to learn everything you need to know about freight factoring!

What Is Freight Factoring?

It’s not easy running a trucking company these days. You have a lot of tasks, from managing and marketing to accounting.

You also have to deal with payments for services you’ve delivered. Typically, you’ll pick up products at one location and deliver them to another. You get paid for your services by either a broker or a shipper.

Your actual profit is the total amount you’re paid for the delivery minus any costs you’ve incurred.

However, you usually don’t get paid right away. A freight broker or a shipping company takes anywhere from 30 to 90 days to pay invoices. This leaves you waiting for the money you need to operate your business effectively.

With freight factoring, you outsource this process to a third-party freight factoring company that will buy your freight invoices at a slightly reduced rate. This enables you to get paid immediately or within a few hours versus a month or more.

Recourse Factoring vs. Non-Recourse Factoring

What happens if the customer doesn’t pay the freight factoring company on time or doesn’t pay at all? This is where recourse vs. non-recourse factoring comes into play.

Recourse Factoring

Recourse factoring is the most common type. Even though you sell an invoice to a factoring company, you still bear the responsibility of collecting the balance from the broker if the freight factoring company cannot.

Factoring companies make every attempt to collect for you. But if a broker refuses to pay, you’ll have to buy the invoice back from the factoring company to take over the collection work.

Recourse factoring is less expensive and easy to qualify for. You also won’t have to do any collections work unless the broker doesn’t pay.

Recourse factoring may be the better option if you have reliable brokers that pay on time regularly.

Non-Recourse Factoring

With non-recourse factoring, the factoring company will take on the responsibility for the debt collection if the broker doesn’t pay.

Since non-recourse factoring is riskier, a freight factoring company may only agree to do this if they know and trust your broker. You’ll only have to buy back the invoice if the debt isn’t collectible for a reason that’s not in your contract.

Many new trucking businesses or businesses with high-risk brokers use non-recourse factoring.

On the other hand, non-recourse factoring is more expanse than recourse factoring and is often only available for specific companies. You also may still have to repurchase the debt for various reasons. So, check the contract terms carefully before committing to non-recourse factoring.

How Freight Factoring Works

Freight factoring might sound complicated, but adding it to your current business flow is actually easy.

The steps to freight factoring are simple. You take your load to its destination and submit your paperwork to the freight factoring company instead of a broker or shipper.

You’ll get paid immediately, and the broker will pay the factoring company within 10 to 30 days.

Benefits of Freight Factoring

Freight factoring can really help your trucking business succeed long-term. First, freight factoring allows you to get same-day payment once your invoice is approved.

This way, your cash flow isn’t interrupted because you won’t have to wait on a broker to pay. If you have a small business or just starting out, you’ll be able to keep a positive cash flow going.

Reduces Your Workload

Freight factoring can save you significant time. You won’t have to spend time with invoicing or follow-up calls. You also won’t have to regularly check on payments or focus on collection efforts.

Since you won’t have to send out multiple invoices, you’ll also have a reduction in accounting work. You can then spend this time focusing on hauling higher-paying loads and growing your business.

You can maximize this time further by investing in LoadPilot Freight Broker Software. This software allows you to easily book your loads and organize your invoices quickly and efficiently.

Allows You to Haul More Loads

With consistent cash flow, you’ll be able to focus on hauling more loads daily. This is because you won’t be worried about covering the costs of moving more freight.

Even better, you’ll be able to hire more drivers, upgrade your equipment, or buy new trucks.

Free Credit Checks

Taking on a new customer is always risky because you have to assume they will pay their bills on time.

Freight factoring companies minimize that risk by running free customer credit checks. As soon as you set up an account with a new customer, you’ll know immediately if they’re creditworthy.

Tips for Choosing the Best Freight Factoring Company

When you’re looking for a freight factoring company, you’ll need to do your research carefully. Be sure to read reviews and ask around the industry for references.

You’ll also need to compare rates from at least three different companies. Keep in mind that, on average, freight factoring companies charge between 0.5% and 5% of the total value of an invoice.

These rates depend on the size of the invoice since larger invoices typically have a lower fee.

Finally, you’ll need to get a good understanding of your specific needs so you can find the best freight factoring company for your business.

Using Freight Factoring for Your Company

Now that you know more about freight factoring, you can start using it to help your business grow.

Before choosing a freight factoring company to work with, remember to do your research thoroughly. If you don’t see the benefits within the first year, you can try another company that may fit your business needs better.

If you’re ready to learn more business tips, you can check out the rest of our blog today!

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