Factoring offers a solution to this dilemma. You simply create an invoice as normal, but instead of invoicing your customer directly, you send the invoice to a factoring company for a small fee. You get paid within minutes or hours, depending on the specifics of your factoring agreement, and the factoring company collects payment from your customer. Loadsmart’s Carrier TMS is a full-service truck management system (TMS) that offers factoring as an integration.

Benefits of factoring

Factoring offers several benefits for trucking companies of all sizes. These include:

• Immediate payment. You’ll get your money in minutes to hours instead of weeks or months.
• Healthier cash flow. Since you aren’t waiting on payment for each load, you’ll have the cash you need to pay your bills and make your next delivery.
• Time and labor-saving. The factoring company collects on the invoices, which means you don’t need to spend time and labor on collections efforts.

Recourse vs. non-recourse factoring

One of the biggest points of confusion for many trucking companies is the difference between recourse and non-recourse factoring. But it’s important to understand because it affects what happens if the customer doesn’t pay.

In recourse factoring, you retain the risk of non-payment. You will sell your invoice to the factoring company and receive your money upfront. But if the factoring service is unable to collect from your customer, you will have to buy back the invoice and pursue further collections efforts yourself. Exactly how much effort the factoring company will put into collections before requiring you to buy back the invoice varies, so be sure to read the fine print in your agreement.

Recourse factoring is often less expensive than non-recourse factoring since you retain the risk. In addition, it is usually available for all your invoices, even if your customer has a questionable payment history. But it can be difficult for smaller trucking companies to come up with the funds to buy back invoices, so it is best for larger carriers who can afford that risk.

In non-recourse factoring, the factoring service assumes the risk of nonpayment. To use non-recourse factoring, you will generally need to work with a freight broker that has been qualified and approved by the factoring company. You’ll sell your invoice to the factoring company, which will take on all efforts to collect from the client.

However, not all non-recourse factoring agreements are the same. Many factoring services have limitations on when they will cover the non-payment. Some cover the invoice only when your client goes out of business or declares bankruptcy, while others will cover nearly all instances of bad debt. Read your agreement carefully to learn exactly which situations are covered.

Other things to consider in a factoring agreement

A factoring agreement is a legal contract, so you will want to read all the fine print. In particular, take a look at the fees section and the terms and conditions.

The factoring commission is the fee you’ll pay on each invoice for using the service. It’s generally a percentage of the invoice amount, though there may be a monthly minimum. Other possible fees include an origination fee for starting the contract, monthly maintenance fees, and an early termination fee.

The terms and conditions spell out the details of your rights and obligations under the factoring agreement. Look for limitations on the total dollar amount and the per-client amount you can have in outstanding invoices, as well as specific instructions on how to create and submit your invoices. You’ll also need to find out whether you can pick and choose which of your accounts to factor. Finally, you will likely need to affirm that yours is a legitimate trucking business with operating authority and that your invoices are free of liens or other claims.

Putting it all together

The trucking industry runs on delayed payments, so it can be difficult to pay for your next load when you are still waiting to get paid for the previous one. Factoring can be an excellent way to solve this issue and build a healthier cash flow. But you’ll want to read the factoring agreement carefully to be sure you understand your rights and responsibilities.

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