top of page

To Factor, or Not to Factor?

That is the question...and to answer it, let's chat about it!

What is factoring?

If you’re new to business, particularly to trucking, then factoring might be something completely new to you as well. Factoring is when a financial institution, or factoring company, such as RTS Financial or Triumph, purchases your open invoices or, in other words, finance your accounts receivables. Some trucking companies factor all of their invoices, while others factor invoices for customers that take the longest to pay. They, the factoring company, will pay you for your invoices. Then the factoring company will turn around and collect payment on your invoice or invoices from your customers (e.g., shipper, broker).

Why use factoring? Why sell invoices to a factoring company?

Trucking companies are not immune to having a lot of bills to pay. There’s no question that unexpected maintenance costs can set you back, and payroll needs to be met. So, the main reason that a trucking company would decide to work with a factoring company is to get paid quickly, like within 24 hours, rather than having to wait on invoice payment terms (e.g., net 15 days, net 30, net 60, net 90) before a customer finally pays you for the load or the work you completed that’s listed on the invoice. With factoring, your trucking company can get access to cash, more sooner than later, to cover expenses, like pay employees or purchase truck or trailer parts.

Are there other benefits to using factoring?

Not only do you get a more steady cash flow, you also get the benefit of back-office accounting services because ordinarily you’d still be responsible for billing and collections. These efforts take time, and time is money. You can use this time in a more productive manner – making money behind the wheel! With factoring, you’re not as concerned with slow or late payments from a shipper or broker. You don’t have to call or email customers to check on payment status. You don’t have to deal with collection agencies to help you get paid. You don’t have to apply for advances and use credit cards to cover expenses when there are gaps. You get to do what you do best – drive!

You might be surprised to know that factoring can also improve your credit because factoring isn’t a loan. It’s a transaction! The factoring company is buying your invoices. They are not loaning you money. This means that factoring won’t affect your credit score or count against your borrowing limits. This allows you to use your credit for other things such as making new equipment or new vehicle purchases.

How does factoring work?

Once you get set up with a factoring company, then it’s more or less business as usual. You get the job done. You send your invoice to the factoring company. You receive a cash advance for the invoice from the factoring company. The factoring company notifies your customer of the factoring arrangement and collects payment from your customer. The factoring company will pay you for your invoice less a small fee for the factoring service that you get in return. You get quick access to cash.

Are there any unexpected issues or consequences with factoring?

One issue that you might run into is a factoring company might not allow you to take a load because the shipper or the broker that you’re working with is new or small to the extent that it has limited credit. In short, some factoring companies are risk-averse and might be quick at telling you no on some loads.

How long does it take to get set up with a service provider?

You can get set up with a factoring company in as little as one day. Don’t feel rushed! Take your time to read the fine print. Understand the contract length, start date and end date, any termination requirements. Ask for a trial period to take the service for a test drive.

What is the cost of factoring? How much does factoring typically cost?

Obviously, factoring comes at a cost. The average cost of factoring accounts receivables (invoices) is typically between 1% and 5%. This rate is only part of what you might end of paying, since other fees may apply. The final cost of invoice factoring will depend on different variables. Some fees are structured based on monthly volume and value of invoices as well as the payment terms and reliability of your customer or client (i.e., your shipper or broker). The more invoices you factor, the more you’re billing, so you can receive better rates with volume. If you customer has solid credit and payment history, then you can often receive better rates as a result. Other fees may apply if, for example, the factoring company requires collateral, money transfers are involved, or monthly minimums are missed. Flat rates are common in the trucking where you pay a one-time flat fee when the invoice is processed.

Basic Example: : Invoice amount of $2,000. Submit to Factoring at a rate of 5%, results in $100 fee ($2000 x 0.05 = $100). You then receive $1900 total for payment from factoring company for your invoice.

When choosing a factoring company, pay close attention to the fee structure. Discuss recourse and non-recourse options. Make sure the factoring company you work with is transparent and forthright about their fees and contract terms. Can you cancel at any time, or do they require so many days’ notice before cancelling? Are there termination fees, guaranteed or non-compliance fees? Does a new factoring company require a buy-out fee to move some existing invoices over to them?

What are recourse and non-recourse factoring? What is the difference between recourse and non-recourse factoring?

Again, freight factoring is a process in which a factoring company buys your invoices at a discount and collects payment from the entity with primary responsibility for paying those invoices such as a shipper or a broker. There are two types of factoring that you are likely to encounter: 1) recourse and 2) non-recourse.

1) Recourse factoring is the most common and it means that you (the trucking company) must buy back any invoices that the factor or factoring company is unable to collect payment on. Recourse, by definition, is the legal right to demand compensation or payment. This means the factoring company has recourse, and so you (the trucking company) will be held responsible for any non-payment. In short, if the customer doesn’t pay the invoice, you pay the factoring company. You (the trucking company) bears the risk of non-payment.

2) Non-recourse factoring means the factor or factoring company bears a majority of the risk of any non-payment by the entity that has the primary responsibility for paying the invoice. Again, this could be the shipper, a broker, or even the consignee. Non-recourse does not shield you from all risk from any non-payment. There are conditions that come with using non-recourse factoring where the factoring company will define the specific situations, like a shipper declaring bankruptcy, when you are not responsible for non-payment. Often times any shipper, broker or the like that has bad credit and a higher risk of non-payment will not be eligible for non-recourse, so the risk remains with you. Since the factoring company bears the risk of non-payment in non-recourse agreements, this is why non-recourse factoring typically have higher factoring rates or percentages. You’ll need to think it through and decide if the higher factoring rate associated with going the non-recourse route is worth it or not.

What are some common mistakes with factoring?

Do your homework. Not all factoring companies are the same. Look closely at their services and fees and research their reputation. Are they flexible and able to grow with your business needs? Talk to other drivers to hear what they recommend. Consider factoring companies that specialize in trucking. Pay attention to recourse and non-recourse factoring. Don’t choose the wrong factoring arrangement. Choose which one is best for you. Read the fine print! Know the rates and fees and how these impact your earnings. You might need to adjust your rate quotes to help you offset your costs in factoring. Finally, one of the most common mistakes that people make when using a factoring company for the first time is failing to have payments sent to the factoring company. Make sure your customer or client (shipper, broker) sends payment to the right place.

Who are some of the major players/different factoring companies in trucking?

Not all factoring companies are created equal, and not all factoring companies are trustworthy and reliable. Look into how long the factoring company has been in business. Seek companies that have been around for some time now and have a decent reputation. These companies are generally more reliable than others. A company’s Better Business Bureau (BBB) rating can indicate the level of service you’ll receive. You can always ask around to learn which factoring companies other people are using and which ones they recommend. Be aware that some factoring companies, such as TAFS, are a recourse-only factoring provider. Below are some of the major players in the factoring world:

What happens when I no longer need the services of a factoring company? What happens if I need to switch factoring companies? How do I terminate or get released from a contract with a factoring company?

If you wish to leave your factoring company, check your current contract with them to see when the contract expires or ends. Look to see if there is a fee for early termination. Notify your current factoring company that you want to terminate your contract. Do this as soon as possible. Don’t delay because most contracts require 30-day notice. This notification may have to be an official letter that you write or type up, sign, and send by mail. It is worth asking a factoring company up front if the termination process can be handled through email. Get things in writing. If you have a clear end date, then find time to sign on with a new factoring company. Advise your customers of the change. Email documentation from the factoring companies that you are no longer with one and are now working with a new factoring company. The new company will request a letter from the previous company to show the new arrangement and the new factoring company will provide you with a new notice of assignment. The previous company is required by law to forward any payments received after any buyout or contract expiration. Allow an appropriate amount of time to switch. There are plenty of factoring companies to choose from, such as RTS, Apex, Triumph, OTR, and more.

Ready to START, DRIVE, & ACCELERATE your trucking business? Check out our course here!

Interested in being notified when more free resources are available? Subscribe down below and you'll be the first to know!

Soshaul Logistics LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It is meant to serve as a guide and information only and Soshaul Logistics, LLC - Copyright 2023 - does not assume responsibility for any omissions, errors, or ambiguity contained herein. You should consult your own tax, legal and accounting advisors before engaging in any transaction or operation.


bottom of page