What is a Factoring Company? (How to Select One as a Carrier)

Visual-explaining-factoring-process

There are a lot of moving pieces in your line of work. As a trucking company, your job is to keep America running by hauling all kinds of freight, come sunshine or harsh weather. 

Doing so, however, is sometimes easier said than done. Particularly when market conditions — like those we’ve experienced lately — make it harder to turn a profit. Let’s be honest: Whether you’re an owner-operator or someone who oversees hundreds of trucks, your fixed expenses have been rising. 

As fuel prices, maintenance costs (labor/parts) and insurance premiums (to name a few) remain high — seemingly without reprieve — you need a reliable stream of income to combat them. 

However, as you probably know, sometimes it can take a while to get paid following a delivery. 

This is especially true when hauling freight from a load board

To promote consistent cash flow and quick payment for each delivery, many freight carriers (like you) work closely with a factoring company. Should you join them? 

Here at Anderson Trucking Service (ATS), our freight brokerage company, ATS Logistics Services, Inc., works with thousands of trucking companies around the U.S. and Canada. Many of these businesses (more than 75 percent, in fact) use factoring companies to receive payment from us. We understand what working with a factoring company is like as well as the pros and cons of doing so as a freight carrier. 

In this article, you’ll learn everything you need to know about working with a factoring company, including how to choose one (if you decide this is the right path for your business, that is). 

What is a Factoring Company?

A factoring company is a business that purchases another company’s unpaid invoices. Factoring companies receive a fee for these purchases and are subsequently charged with pursuing/collecting the outstanding receivables from the party responsible for paying them. 

These companies have a lot of cash on hand, allowing them to pay invoices immediately. 

This can be particularly attractive to businesses with customers that take 30 or more days to provide payment. Apart from transportation organizations, construction companies, staffing agencies, security businesses and consultant firms commonly use factoring to achieve steady cash flow. 

Related Article: Top 15 Factoring Companies to Consider For Your Trucking Business This Year

Why Do Trucking Companies Use Factoring?

Trucking companies of all sizes may experience cash flow problems at one point or another. 

Factoring companies solve this issue. 

As service providers in this fast-paced industry, carriers (like you) are constantly paying for things. Factoring companies help shorten the time between when a trucking company delivers a shipment and when it’s paid. In turn, this gives a carrier more liquidity to use for expenses, investments and other commitments. 

The Advantages of Using a Factoring Company

As you consider whether to begin working with a factoring company, there are several things you should consider. First, you’ll want to understand the true benefits of using factoring to receive payment. Here are two of the largest ones: 

  1. Receive payment for delivered loads faster (way faster)
  2. Avoid the headaches of retrieving payments

1. Receive Payment For Delivered Loads Faster (Way Faster)

In the transportation world, it’s not uncommon for an invoice to remain outstanding for 30, 60 or even 90 days at a time. This can be very disruptive for most trucking companies, which often operate on a tighter timeline than this allows. 

When they use a factoring company, carriers can receive payment as soon as they’re finished with each shipment. In the long run, a factoring company can become a seamless extension of the carrier using it; providing a reliable stream of income at a regular cadence.

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2. Avoid the Headaches of Retrieving Payments

As a trucking company, you may have hundreds of customers in a year. Many of these businesses will handle their invoices uniquely. This makes it difficult to keep everything straight; when you’re getting paid from who, what information/documentation you need to provide, who you need to talk to, etc. 

When you work with a factoring company, all of these details are handled for you. After you’ve signed on with one, all you need to do is hand them your invoice and they’ll send you payment. From there, it’s their job to chase down payment from your customer, leaving you with money in the bank and without the headache this can become. 

Additionally, when you work with larger shippers/freight brokers, it’s likely that your factoring agency has an existing relationship with them which can make the entire process smoother.

The Disadvantages of Using a Factoring Company

  1. Factoring company fees
  2. Terms and conditions can be confusing

1) Factoring Company Fees

While factoring companies expedite the payment process, they charge a fee for doing so. This fee is based on a percentage of your income, leaving you with less money than you would’ve otherwise made for each shipment. 

Usually, factoring firms take one to five percent of each invoice’s value. However, this can be more or less depending on the terms you negotiate. 

On a one-off basis, one to five percent isn’t a large chunk ($10-$50 on a $1,000 invoice). That said, these fees compound over time, which is something to consider if you don’t want to lose this percentage of your income over the course of a year. 

2) Terms and Conditions Can Be Confusing

Navigating and understanding the terms and conditions of your relationship with a factoring company can sometimes be difficult. The intricacies and jargon used in these contracts can be overwhelming for many business owners which might lead to misunderstandings or unexpected financial obligations

Woman-reading-through-long-contract

Most specifically, the trucking company is on the hook for any factored payments they receive until this debt is rectified by the business responsible for paying the initial invoice. This can put a strain on the relationship between a carrier and their factoring firm — especially if they didn’t know about this when entering their contract. 

How to Choose a Factoring Company 

Driving your business forward relies on your ability to make sound choices for it. The majority of trucking companies utilize factoring in some form. However, without choosing a provider carefully, you may end up doing more harm than good. As you look to make improvements in this segment of your business (and perhaps add a factoring firm to the fold), think about these three things: 

  1. Consider the fees you’ll pay
  2. Analyze each factoring company’s reputation
  3. Understand their terms

1. Consider the Fees You’ll Pay

The fees a factoring provider charges should, of course, influence your selection decision. Make sure to ask these companies what their fee structure is, when they’ll levy it and what (if anything) would make your fees increase/decrease over time. 

You certainly don’t want to end up paying more than you thought you would for any existing hidden fees. Don’t enter into a factoring contract without understanding the company’s fee structure

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2. Analyze Each Factoring Company’s Reputation

As the company you’ll lean on to receive payment of the work you accomplish, your factoring company needs to be in good standing. That’s why you’ll want to practice some due diligence here. 

Vet potential factoring providers by looking at reviews on their Google business profile or third-party websites. Additionally, do some digging on their website. How long have they been in business? Do they have experience offering factoring to transportation companies like yours? 

This information will help you make a sound decision before any money exchanges hands. 

3. Understand Their Terms 

Contracts can be confusing. Factoring companies use them to set the terms of each relationship they hold with their customers. This ensures a mutually beneficial relationship for all. 

That said, many factoring providers apply charge-back fees or withhold letters of release when payments aren’t made or arrears exist. So you’re not caught off guard, spend some time examining these terms. If you have any questions, be sure to bring them up before signing on with a new factoring business. 

Use Factoring as a Trucking Company

Receiving payment for your delivered loads can sometimes take a while. It doesn’t have to though; factoring companies can pay you faster. Your trucking company has expenses on the horizon and decisions to make. That’s why you need steady cash flow.

If you’re considering using a factoring company, however, there are pros and cons. 

Pros:

  • Quick payment 
  • Fewer headaches from chasing down payments

Cons: 

  • Factoring companies charge a fee
  • Factoring company terms and conditions can be confusing

Before you sign anything with a new factoring provider, be sure to understand its fees, how payment will work and whether they have a good reputation. This will help you avoid any mishaps or confusion in the future. 

Usually, factoring is a pretty seamless process for trucking companies like yours. If you become a brokered carrier for ATS Logistics, you can use factoring like many of our carriers do (we probably already work closely with the factoring company you’re considering). 

ATS Logistics also has a load board app you can use to make searching, finding and booking loads way easier. Check out ATS FreightMatch today. If you have any questions about factoring or what working with ATS is like, don’t hesitate to contact us — we’re happy to help you in any way you need. 

Tags: Carrier Resources, Factoring

Mary Wolf

Written by Mary Wolf

Mary is the accounts payable manager at ATS. Mary's journey with ATS started in 2015 when she was hired as a temp for ATS International. Later that year, Mary joined our accounts payable team and was promoted to billing and pay supervisor in 2018. As our accounts payable manager, Mary loves the fast-paced nature of her work. No two days are the same on the ATS accounting team and Mary relishes the opportunity to support ATS' many departments through truly meaningful work.

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