How To Choose The Right Trucking Factoring Company

How To Choose The Right Trucking Factoring Company

A trucker reviews information on a clipboard.If you’re a carrier or owner-operator in the trucking industry, you’ve no doubt experienced major gaps in cash flow between deliveries. In fact, the industry average is about 30–45 days to receive payment — with some taking as long as 90 days to pay.

While this is standard for business-to-business transactions in any industry, it doesn’t mean it’s not hurting carriers and owner operators. Between fuel costs, vehicle maintenance, and monthly bills, having to wait weeks to get paid for a job that was already completed can put carriers in a tight spot, not to mention the time and attention required to ensure each invoice is paid.

So, what’s the solution?

Freight factoring has been a part of the trucking industry for decades, and as growth trends continue to shape the industry and attract new drivers, more and more companies are turning to trucking factoring to get paid faster. For carriers and owner-operators, this means there’s an abundance of factoring companies to choose from. With so many options available, it can be challenging to sort through the excess and find the right service to meet your needs.

This guide will cover what freight factoring is and offer tips to help you choose the best trucking factoring company for your needs.

What is freight factoring?

So what is factoring? Sometimes referred to as load factoring or trucking factoring, freight factoring is a valuable financial service that helps carriers and owner-operators receive payments faster. Many people think that factoring is similar to or the same as lending, but this is a common misconception.

With lending, you take out a traditional bank loan and use the invoices you receive from a broker or shipper as collateral. Although you get the money when you need it, you will have to pay that money back once your invoice eventually gets paid. Factoring, on the other hand, involves selling your invoices to a trucking factoring company. The company pays you right away and then it is up to the factoring company to collect on the invoice. As soon as you factor the invoice, you are paid and no longer play any role in invoicing the customer, following up for payment status, and allocating checks or deposits when they are received a month or more later.

Whereas lending involves incurring debt you must pay off (usually with interest), the factoring company owns the invoice once you sell it to them, so you don’t owe a debt. You simply get paid earlier — minus a small fee to the factoring company for offering the service.

How does factoring work?

How are factoring companies able to pay you in advance? Let’s take a look at how the process works.

Factoring is unique because it has virtually no involvement with your operation until a load is completed, meaning you retain full control over your business and how it’s run. That said, factors do need to ensure that they will get paid by your customer when you factor it, so many factoring companies will need to approve the broker or shipper before you accept a load. Broker approvals are simply a quick check to see the broker’s credit score, and as long as the factor feels confident the broker will pay in the amount of time they say they will, they are approved to factor. The process is made even easier with DAT Load Board and OTR Solutions as OTR’s approved brokers are represented as a blue checkmark on the load board, cutting out the need to go and check them separately before booking.

If you aren’t working with a pre-approved broker or shipper, the factor will then perform a credit check to ensure you’re partnering with legitimate businesses with a good reputation for making payments on time. Once you’ve received approval, you can book your load and make the delivery as you would normally. If the factoring company does not approve the customer, in most cases that doesn’t mean you can’t take the load, you simply need to handle invoicing and payment on your own directly with that customer.

After completing the job, the factor will request copies of the paperwork from the load before issuing payment. Load paperwork is almost always accepted as scans and can be submitted via email, through an online portal, or using a mobile app. Before giving you the funds, a factor may want to see:

  • Rate confirmations
  • Proof of delivery (POD)
  • Any additional paperwork associated with your delivery like a scale ticket, lumper receipt, or invoice.

Upon receipt of these materials, the factor will check them to make sure everything has been included, and initiate payment to your account. Factors pay the total invoice amount less a discount fee, so new and small carriers who usually pay a 3% factoring rate would receive $970 on a $1000 load. This is rapidly becoming competitive versus alternatives and enables you to have funds in your account in as little as 24 hours after submitting your invoice — rather than 30 to 90 days after completing the delivery, or several days if taking quick pay.

Once you submit your documents and the trucking factoring company pays you, the factor fully owns the invoice. That means it’s their responsibility to follow up with the customer regarding payment. You can say goodbye to wasting time on collection calls, leaving you free to focus on making more deliveries or taking care of other workloads within your business.

What are the advantages of factoring?

In addition to speeding up the payment process, factoring has plenty of other benefits that make it the preferred method for many in the trucking industry. In fact, freight factoring has been prominent within the trucking industry for many years largely due to the extensive benefits it offers. These include:

Improving your cash flow
The amount of time, stress, and money saved by using a freight factoring service is the main reason why many trucking companies use them. Before the rise of factoring, carriers could experience detrimental gaps in their cash flow, forcing them to rely on credit cards or loans to keep operations moving. Now, in exchange for a small service fee, carriers not only get paid within hours, but also gain a full team of back-office professionals to handle each invoice you factor and avoid the risk of having to take on debt to cover vehicle maintenance, fuel, or other expenses.

Boosting back office operations to lighten your load
In addition to acting as a cash-advance service, factoring companies can provide back-office support that can significantly reduce your administrative duties. Settling disputes with brokers and shippers, performing credit checks on customers, invoicing, and following up on collections are all time-consuming tasks that can eat into your productivity, and often your profitability. However, when you work with a factor that offers back-office support, you can take these jobs off your plate and focus on picking up more loads. Having extra time can be a huge boon in a competitive market as it can open new opportunities for you to pick up more loads, increase your revenue, or even explore additional options for growth.

What to consider when choosing a truck factoring company

Now that you know what freight factoring can do for you, you might still doubt whether the service is right for your needs. Consider the questions below. If your answer is yes to at least two of them, it might be time to turn to a truck factoring company for help:

  • Are you spending a lot of time trying to collect payments from customers?
  • Are you struggling to find reputable customers that pay you on time?
  • Are you having to go long periods without getting paid?
  • Are you settling disputes with brokers on your own?
  • Are you constantly worried about whether you’ll have enough funds between deliveries?

Stressing daily about these types of issues can take its toll. If you’re ready to find the best factoring company to help lighten your load, we’ve prepared a few tips to keep in mind as you weigh your options.

Look for recourse & non-recourse factoring
One of the best ways factoring caters to different carrier types and operations is by adjusting the amount of risk each party owns in the collection process, resulting in recourse factoring and non-recourse factoring. With recourse factoring, you are ultimately responsible for reimbursing your factor if the customer doesn’t pay after a certain period, usually 90 days from when the invoice was factored. You may wonder why anyone would want this, but some carriers, usually those operating 5 or more power units, might prefer this option because of the increased flexibility in broker and customer credit approvals.

Since you, the carrier, is ultimately responsible for reimbursing your factor if a customer doesn’t pay, the factor does not need to restrict what customers you can work with based on their credit score as you understand in taking the load that the risk will ultimately fall back on you. Also, since the factor holds less risk, recourse programs are generally less expensive when compared to non-recourse programs.

With non-recourse factoring, the factoring company holds any risk associated with collecting on factored invoices from your customers, not you. Most carriers opt for a non-recourse program because of the lower risk on their business and the peace of mind that their cashflow will not be disrupted if a customer does not pay.

Comparing recourse and non-recourse invoice load factoring is easy when defining them as they should be, but most factoring programs available are not this black and white. True non-recourse factoring is rare, and most factors who claim to offer non-recourse are really offering recourse factoring with the added protection of covering you if the broker goes bankrupt before making payment. Now, keep in mind non-recourse factoring programs require you to work with brokers and shippers the factor has already approved based on their credit score, meaning the likelihood of bankruptcy is virtually zero. What carriers often miss is almost every late and non-payment on an invoice is caused by an issue with the invoice itself. If your factor didn’t check to ensure every page of the proof of delivery or rate confirmation was submitted, they won’t get paid and you will have to pay them back for that mistake.

To avoid finding yourself in an unexpected situation, it’s important to do your research beforehand so you choose the right factoring company. At DAT, we believe we’ve found the right company. Through our partnership with OTR Solutions, DAT offers the only true non-recourse factoring. That means OTR Solutions will cover the cost when a broker or shipper doesn’t pay the invoice, even if they are still in business.

Look for load board partnerships
When factors run a credit check to approve a broker or shipper, they’ll ask for information such as their name and motor carrier number. Save some extra time and make the load booking process easier by choosing a freight factoring service that’s already integrated into a trusted load board, meaning they can see all the information about every load you pick — and even list pre-approved loads — right away.

Our partner OTR Solutions does just that. OTR Solutions is a great freight factoring service that lets you see all the loads that are pre-approved right from the same load board you were already using to find freight. That means easier, stress-free booking with the confidence of knowing you’ll be able to factor each load you pick up.

Additional features to look for
In addition to those two main characteristics, also look for trucking factoring companies that:

  • Offers true non-recourse factoring or customizable recourse factoring program
  • Provide you with an account manager to manage your back-office tasks
  • Use an online portal or mobile app to simplify the factoring process
  • Offer 24/7 credit checks so you can operate at your convenience
  • Don’t have monthly minimums or volume restrictions

Choose the right truck factoring company

Nobody knows the trucking industry like DAT. That’s why we’ve partnered with OTR Solutions to offer freight factoring services that can streamline your operations and help you focus on growing your company. We proudly maintain trucking’s largest load board and have several additional services that can get your business up and running.

Make your life easier with OTR Solutions!

As a carrier, you could always use more time and money — and that’s exactly what you’ll get when you work with OTR Solutions, DAT’s trusted factoring partner.

Ready to improve your cash flow and gain back-office support? Start factoring with OTR Solutions today!

OTR Solutions

DAT's factoring partner