If you are in the freight industry, you may have heard the term “Freight Factoring”. Factoring has now become a popular way for the owner-operators and trucking organizations to keep you away from lengthy delays in payment on invoices.
Moreover, multiple drivers and business owners don’t understand accurately what it is, or how it works. Freight Factoring has the potential to serve profit to various stakeholders in the trucking industry by offering an invasion of working capital into the organization.
Going through the ultimate guide to factoring offers an in-depth understanding to help you make a perfect decision when determining if a transportation factoring organization is right for you.
Let’s dig in to understand the whole process quickly & easily!
What is Freight Factoring?
Freight Factoring is the process of selling the business's outstanding invoices to a factoring organization for cash. This service is a huge help to trucking companies who have just started their business and don’t have enough capital to cover the cost of their next load until they receive full payment for the load.
Factoring a load into trucks and trolleys allows the owner/operator to continue accepting loads and expanding the business efficiently.
Unlike a traditional bank loan, freight factoring suffers no new debt for a business. Getting approved is a lot easier and more instant with a freight company. It is also advantageous as the typical pay term from a customer can be anywhere from 30, 60 to 90 days. This can be dissimilar for truck drivers that have started relationships with direct shippers.
There is no long wait time when you work with a trucking factoring organization. It also offers a source of consistent cash flow with no new debt from financial bank loans.
How does Freight Factoring Work?
The process starts when the freight factoring company buys their client's invoices to pay them instantly once they receive the freight bills. Depending on which organization you work with, pay times may differ from time to time.
Whereas, the best factoring company will pay you within 24 hours of receiving invoices. The freight factoring process includes multiple steps such as:
The trucking company applies to the factoring organization. From there, the factoring company will put out the respective factoring contract that will include all the rates and fees.
Once you have received the approval, the trucking company reserves a load and gets a rate sheet. A Bill of Lading (BOL) is signed at both locations to authenticate the pick-up and drop-off location.
Further, the BOL is sent to the factoring company so that the trucking company can receive the payment. After deducting the factoring fee with the agreed-upon payment terms, the trucking factor authenticates the invoice amount.
At last, the freight broker or shipper pays the factoring company within 30 to 90 days.
The process may differ depending on your freight factoring company. Multiple trucking factoring organizations will cross-check you or your client to minimize working with debtors who don’t pay.
This helps freight forwarding companies to choose between brokers and shippers they should collaborate with. They also need to decide if they want to sign up for factoring agreements.