The Ultimate Guide to Choosing The Best Factoring Company for Trucking
Part 1: Understanding The Basics of Freight Factoring
If you are a trucking business investigating freight factoring companies, this guide is designed specifically for you. The information presented in this guide provides much more than theories and suggestions, it identifies the critical information you need to assess a factoring company. It provides a step by step process for making an informed decision when choosing the best factoring company for your trucking business.
Owners of trucking companies are diverse and manage their businesses differently. Perhaps you are a road warrior who has chosen to operate your own freight carrier service rather than haul for someone else. You may be a fleet owner or manager with an accounting or other professional background. Or perhaps you are a freight broker with a start-up business to manage. No matter your situation, if you are operating a business in freight transportation, you need reliable access to working capital to sustain operations and support growth.
Freight factoring is a specialized form of invoice factoring designed specifically for the transportation industry. It has emerged as a mainstream financial strategy for trucking companies to improve cash flow. As it is a specific form of accounts receivable factoring, it will be referred to throughout this publication as either “freight factoring”, “freight bill factoring” or it’s more general term “invoice factoring”. In essence, it’s the selling of account receivable invoices at a discount in exchange for immediate cash. Although used extensively throughout the course of history and well ingrained in today’s global economy, the practice of invoice factoring is vaguely recognized and often poorly understood. The benefits are potentially extensive, but the anguish resulting from choosing the wrong invoice factoring company to work with can be equally devastating.
The decision to start factoring freight bills to gain immediate access to working capital is a sound business decision. The process of selecting the right factoring company for your trucking business requires a planned strategy and careful consideration. The information presented in this publication is the ultimate guide to assist you in choosing the best freight factoring company for your trucking business.
The Importance of Reliable Cash Flow
A Brief Introduction to Factoring for Trucking
Freight transportation is a capital intense industry that demands continuous access to working capital to support fleet operations. The ability to effectively manage regular and reliable cash flow has a substantial impact on the success or failure of a trucking company. Despite being a vital support service and the backbone of the nation’s economy, transportation is considered a volatile industry by conventional lending institutions. Commercial banks are highly unlikely to approve an operating line of credit unless a trucking business can produce strong financial records and a sound credit history. For a majority of trucking companies, this is a difficult barrier to overcome. Even if a trucking company manages to secure a conventional business loan, the adherence of restrictive covenants to maintain a bank loan can choke a trucking company’s ability to grow and prosper.
As banks become more restrictive, a greater number of trucking companies are leaning towards alternative financial solutions to improve cash flow. Due to its ease of qualification and speed of funding, freight factoring has emerged as a common financial strategy to support growing fleet operations.
For truck company owners, qualifying for freight factoring is relatively easy. If a client has credit worthy customers, almost any factoring company will approve funding. The difficulty lies not in getting funds, rather in selecting the right factoring company best suited for a trucking business. Choosing the right factoring company is perhaps the most difficult task in managing a freight factoring facility.
If there is one prevailing imperative for trucking companies, a golden rule that supersedes all other considerations when choosing an invoice factoring company, it is simply this:
Choose an invoice factoring company that specializes in the trucking industry.
Freight transportation is a challenging industry wrought with risks and difficulties that uniquely separate it from any other. The financial provider best suited to support the efforts to meet these challenges will be well versed in the industry. Freight factoring is a highly specialized funding solution designed specifically for the trucking industry. It is unsurpassed as the preferred factoring option for best rates and fast funding. This guide provides a step by step process for researching and selecting a freight factoring company best suited to meet the needs of a trucking company.
How to Use this Guide
Finding the Best Factoring Company for Trucking
This guide is structured to conduct you through the process of choosing the right factoring company best suited to meet the needs of your trucking company. Take the time to read and thoroughly understand this material to better prepare yourself for discussion with your future factoring company. The goal is to identify a factoring company that is professional, flexible, transparent and well suited to coordinate systems and work practices with your company.
The guide provides learning objectives, definitions, notes, tips and check lists to simplify the information.
Each chapter begins with “Learning Objectives” to clearly establish the information to be provided and the lessons to be learned.
In order to ensure clarity of the information provided, a definition of terms used in the chapter are presented upfront.
To further facilitate the transfer of information, a Glossary of Terms is included in Appendix C.
Information of particular importance are flagged and noted in this format
Tips on what to look for when choosing a factoring company are presented in this format.
- Each chapter concludes with a check list of the questions and information needed to be verified by the factoring company you are investigating. A master check list is included at the end of the guide in Appendix B. It is provided as a tool to be used during discussions with factoring companies.
Factoring Terminology and Principle Concepts
In order to have a complete understanding of how factoring works, it is very important to understand the basic terminology and the principle concepts of freight factoring. With this understanding you will be able to ask better questions and make an informed decision when choosing the best invoice factoring company for a trucking business.
Here is an overview of some common terms used in this guide:
Factoring: A form of business funding where a company sells their invoices to third party called a factoring company in order to acquire advance funding.
Factoring Company: A company that provides factoring services. Also known as the Factor.
Client: The Trucking Company who sells their invoices to a factoring company. Also known as the Client Company.
Customer: a business that utilizes the services of the Client and remits invoice payment to the client’s factoring company. Also known as the Debtor.
Figure I: The Relationship Between Factoring Participants
The Funding Elements
Advance: The amount of money that the factoring company advances to the client when they buy their invoice. The advance is usually a percentage of the gross invoice value and is advanced to the client soon after the invoice is purchased.
Reserve: The percentage of the invoice that is held by the factor until full payment of the invoice is received from the Debtor, at which time this amount is remitted to the Client.
Fee: The service charge for financing an invoice. This fee is usually a percentage of the gross value of the invoice, typically deducted either from the Advance or from the Reserve.
For a more in-depth understanding of the terminology associated with Invoice Factoring, refer to Appendix C of this guide.
What is Invoice Factoring
A Simple Explanation
Factoring is a type of invoice financing, but it is not a loan. Very simply, invoice factoring is the practice of selling account receivable invoices to a factoring company at a discount (The Fee) in exchange for immediate cash (The Advance). The factoring company then takes over AR management and credit control of the invoices and, when payment is made, pays the client business the remaining balance (The Reserve).
Figure II: Anatomy of a Factoring Transaction
Freight Factoring is a particular form of invoice factoring designed specifically for transportation companies. Main features include best rates for trucking companies, fast funding and ease of use.
How does Freight Factoring work
4 Steps to Immediate Funding
- The Client Company delivers freight to the Customer and then sends a copy of the invoice and bill of lading to the Factoring Company.
- The Factoring Company sends the Advance (typically 85% to 100% of the invoice amount) within 24 hrs. The balance is kept as the Reserve until the invoice is paid in full.
- The Customer remits payment to the Factoring Company.
- The Factoring Company refunds the Reserve (balance owing) to the Client.
Figure III: How Factoring Works
Who Uses Freight Factoring
Trucking businesses of all sizes use freight bill factoring to obtain cash advances on their unpaid sales invoices. It is a simple means of accessing immediate cash on funds that are already due. It is estimated that 15% to 20% of trucking companies and freight brokers employ the services of a freight bill factoring company to improve cash flow and fuel growth. Utilizing the benefits of freight factoring is now considered a mainstream financial strategy for startup, established and growing trucking companies.
- One truck companies
- Small fleets
- Startup companies
- Medium fleets
- Large fleets
- Growing fleets
- Freight brokers
How to Research Freight Factoring Companies
Reliable access to working capital is a critical necessity for any trucking company. Without adequate operating funds, trucks grind to a halt and revenue ceases. Partnering with a finance company is a vitally important decision and a serious commitment. If a trucking company has decided to utilize freight factoring to improve cash flow, they are choosing a solid financial strategy. However, the right freight factoring company to best meet the needs of a trucking company is not a decision that should be taken lightly.
Ensure to perform proper due diligence to identify factoring companies that specialize in trucking. Finding and selecting a good factoring company should be managed much like hiring an employee; research the candidates, interview them and choose accordingly.
The easiest first step of investigation is to perform an online search in Google or Bing. Narrow your search to limit the results to the most relevant companies. The best search results are those that produce a list of factoring companies that specialize in trucking.
Recommended Search Terms:
- Freight Bill Factoring
- Factoring for Trucking
- Factoring Companies for Trucking
Once the SERP (Search Engine Result Page) displays the list of website selections, click on several of the listings that best meet your needs. The best choices will indicate that they serve the trucking industry. Take the time to visit the websites of your choice and get a sense of the products and services they provide. When you are satisfied that you have found one or two worth investigating further, contact them directly by phone, contact form or live chat. Once you have the opportunity to ask questions, don’t be afraid to ask a lot. You need to get a thorough understanding of who it is you will be working with, what exactly they will be providing to you and what are the terms of the factoring agreement. Following are the key details that need to be discussed, understood and agreed to prior to committing to any one factor:
- Factoring Fees
- Speed of Funding
- Contractual Terms
Each of these topics are significant and require a deeper understanding of their importance. The following chapters are an in-depth review of each topic with strategies to assess the service capabilities of the various factors you are about to investigate.
Types of Invoice Factoring
Understanding the Various Classifications and Types
Invoice Factoring is a general term that classifies various forms of accounts receivable financing under one umbrella. These many derivations have evolved and are tailored to service the needs of specific industries. The products and services available are wide ranging and varied but can be categorized and separated by distinct types.
Understanding the various classifications and types of Invoice Factoring will better prepare you for choosing the best factoring solution to service the needs of your trucking company.
After reading this chapter, you should be able to:
- Understand the basic categories of invoice factoring
- Understand the different types of factoring
Before reading this chapter, you should know the definitions of
Recourse Period: the time that a factoring company allows for the customer to pay an open invoice that the factor has funded.
Non-Recourse Factoring: a factoring agreement which, if the debtor does not pay the invoice due to an insolvency during the recourse period, the factoring company assumes the risk of non-payment.
Recourse Factoring: a factoring agreement in which a client company sells its invoices to a factoring company with the understanding that if the invoice exceeds the recourse period (usually 60 to 90 days) and remains unpaid for any reason, the client company will buy them back.
Notification: The act of notifying customers that their payments for the services provided by a supplier are to be paid to a factoring company.
Non-Notification: The act of factoring invoices without the knowledge of customers (debtors).
The information presented in this chapter is designed to give you an overview of the wide ranging variations of Invoice Factoring. The purpose is to provide the information you require in order to make your first decision; choosing what form of invoice factoring will best suite the needs of your trucking company.
Basic Categories of Invoice Factoring
Although varied, invoice factoring can be separated into a few basic categories:
- Non-Recourse vs Recourse
- Notification vs Non-Notification
Non-Recourse vs Recourse Factoring
Non-Recourse Factoring: a factoring agreement which, if the Debtor does not pay the invoice due to an insolvency during the recourse period, the factoring company assumes the risk of non-payment.
Non-Recourse Factoring protects in one circumstance only; failure of payment by reason of a customer becoming insolvent.
Non-Recourse Factoring is perhaps the most misunderstood form of invoice factoring. It is generally presented as a no risk option to protect a trucking company should a customer fail to pay their invoice for any reason. It is commonly understood that the factoring company is responsible to absorb the loss leaving a trucking company free and clear of encumbrances. In reality, Non-Recourse Factoring protects in one circumstance only; failure of payment by reason of a client’s customer becoming insolvent. If non-payment is due to any other reason, the client must pay back advanced funds, plus penalties to the factoring company.
It is imperative to understand the full extent of the terms governing a Non-Recourse agreement before you sign a contract. This unfortunately is not an easy task; Non-Recourse factoring agreements often do not contain the full terms of the contract. Instead, the contract references an additional set of terms that exist in an online document. It is left up to the carrier to navigate to this document, read it and understand its implications before signing the agreement.
A publicly posted website, containing the terms and conditions that apply to a Non-Recourse factoring agreement, includes the following definition:
“Non-Recourse Credit Guarantee” – means the assumption by Purchaser (the factoring company) of the risk of non-payment on certain Purchased Accounts identified by Purchaser, so long as the cause of non-payment is solely due to an Account Debtor (the carrier’s customer) becoming Insolvent.
According to the meaning spelled out in this definition, the only financial protection a carrier receives against non-payment is if the carrier’s customer becomes insolvent. If the invoice is not paid for any other reason, such as a service dispute, poor quality documentation, or any number of other issues, the carrier is liable and must repay the factoring company.
The incidence of a customer failing to pay due to insolvency is statistically low. Therefore, the protection provided by Non-Recourse is minimal.
The incidence of a customer failing to pay due to insolvency is statistically low. Therefore, the protection provided by Non-Recourse is minimal, yet the cost is generally 25% to 35% higher than Recourse Factoring, Recognizing this specific detail is important to understanding the extreme limits to the perceived value of Non-Recourse Factoring.
Recourse Factoring: a factoring agreement in which a company sells its invoices to a factoring company with the understanding that if the invoice exceeds the factoring period (usually 60 to 90 days) and remains unpaid for any reason, the company will buy them back.
Recourse factoring provides greater value than Non-Recourse and is the preferred choice by owners of trucking companies.
Recourse is the most commonly used form of invoice factoring by trucking companies. Although it appears less advantageous to a business, Recourse Factoring provides greater value than Non-Recourse and is the preferred choice by owners of trucking companies.
Figure 1-1: Advantages of Recourse Factoring
- Fees are typically a third cheaper than Non-Recourse Factoring
- Diligent account receivable management by experienced factoring companies significantly reduces the incidence of unpaid invoices to few and far between.
- Freight Factoring Companies record a high success rate on freight bill collections.
- Fewer credit restrictions allow a trucking company to haul for a larger pool of customers.
Learn more about Recourse Factoring and to understand why it has become the preferred choice of trucking companies.
Notification vs Non-Notification Factoring
Notification occurs when a factoring company notifies a client’s customers (debtors) that their payments for the services provided by the client should be paid to your factor. Freight factoring has become a common cash flow strategy within the trucking industry. Customers’ accounts payable departments are likely dealing with factoring companies all the time and are well versed with the practice.
Customers’ accounts payable departments are likely dealing with factoring companies all the time and are well versed with the practice.
Non-Notification factoring is entirely different in that the customer is not notified, nor made aware that the client is factoring invoices. Instead all paperwork and communication conducted by the factor with the customers are made as if it were coming from the client. Decades ago, this was used as a means of disguising the fact that carriers were factoring their invoices. Today, freight factoring is common practice and well accepted throughout the industry. This form of factoring is rarely used by contemporary transportation companies as it is a higher priced option and a less efficient process.
Figure 1-2: Sample Notice of Assignment Letter to Customers
Different Types of Invoice Factoring for Trucking
The number of different types of factoring is extensive. Factoring companies have created varying facilities to meet the needs of numerous industries.
The number of different types of factoring is extensive. Factoring companies have created varying facilities to meet the needs of numerous industries.
The number of different types of factoring is extensive. Factoring companies have created varying facilities to meet the needs of numerous industries. These divergent types of Invoice Factoring can differ widely, depending on their intended use. To keep this information relevant to the trucking industry, we will discuss the types of factoring that are pertinent to transportation companies.
Types of Factoring include:
- Spot Factoring
- Factoring Line of Credit
- Freight Factoring
General Account Receivable Factoring:
General Account Receivable Factoring is the most all-purpose form of factoring. It is most often employed by manufacturing, import/export companies and staffing agencies to name a few. Usually, advances are 75% to 90% of the face value of the invoice.
Spot Factoring is the selling of a single or one-off invoice to a factoring company. It is ideal for businesses that receive one-off orders or that choose to fund only their largest receivables when cash flow is required. It is basically a pay-as-you-go facility which only carries a cost when money is advanced. Spot factoring is rarely available to transportation companies as it is intended for companies that issue invoices in smaller amounts, but in larger dollar values.
Factoring Line of Credit:
A Factoring Line of Credit facility is A/R based and performs very similar to, but with greater flexibility than a commercial operating line of credit, which is asset based. It provides a line of credit equaling a percentage of the combined book of accounts receivables owed to the client. The line can be drawn on as needed and fees are applied only to funds drawn plus a small administration fee to manage the accounts receivables. This particular form of factoring is extremely cost effective and beneficial to large fleet operations that have a robust in-house AP department to manage the facility.
Freight Factoring is a particular form of invoice factoring designed specifically for transportation companies.
Freight Factoring is a particular form of invoice factoring designed specifically for transportation companies. To meet the needs of a demanding industry, freight factoring provides easy qualification, fast funding, easy document submission and ease of use. Factoring fees range depending on the factoring company, but typically are much more competitive than general accounts receivable factoring fees.
Summary: Types of Invoice Factoring for Trucking
In order to select the best factoring company to serve the financial needs of your trucking business, it is important to understand the vast array of factoring facilities available. Freight transportation is a unique industry with distinct issues commonly shared by most trucking companies. Selecting the best factoring company to partner with should be an informed decision based on a full understanding of the types of factoring facilities available.
The following check list is short, but deep in its significance. If you agree to a factoring service based on a great price, but it is an inadequate service to support your fleet operations, then trouble lies ahead.
- Does the factoring company provide the type of factoring that's right for your business?
Copyright 2018, Accutrac Capital Solutions Inc.