Factoring, also known as accounts receivable financing, is when factoring firms purchase your open invoices and, in return, provide payment within 24 hours. That firm then collects payment on those invoices from your customers.
Why Do Trucking Companies Use Factoring?
- Faster Payment: Rather than waiting up to 90 days for customers to pay, factoring gives you access to same-day funding on outstanding invoices.
- Increased Cash Flow: With factoring services, you can quickly boost your working capital and use those funds for business expenses like payroll funding, maintenance, emergencies and more.
- Business Growth: Additional cash flow from factoring can be used to handle more customer orders, purchase new or used equipment and take on more business.
How often a company uses freight factoring services will depend on their business needs. Some trucking companies factor all their invoices, while others only use factoring for certain customers.
How Does Invoice Factoring Work?
- You deliver goods or perform a service for your customer.
- You send the invoice to RTS.
- RTS pays you up to 100% of the invoice amount, often within 24 hours.
- Your customer pays RTS within the agreed terms (e.g., net 30) and RTS sends you the remaining balance minus a small fee.
Additional benefits of freight factoring:
- Free back-office support, including managing your collections
- Based on the quality of your customers’ credit, not your own credit or business history
- Customized to provide capital when your company needs it
- No debt incurred (unlike traditional loans)
- Scalable funding that grows with your company
How Much Does Factoring Cost?
Factoring firms make money on the factoring fees for each invoice, and different factors have different fee structures.
Some only charge an overall factoring fee, which is determined by the monthly volume of submitted invoices and the creditworthiness of a customer’s clients. Meanwhile, other factoring providers have additional fees that cover money transfers, collateral and other operational costs.
When choosing a factoring company, pay close attention to the fee structure. Make sure the factor you work with is upfront about the fees they charge.
Are There Different Kinds of Factoring?
The two main types of factoring you can choose from are recourse and non-recourse.
Recourse vs. Non-Recourse Factoring
- Recourse Factoring: This type of factoring means the freight factoring customer will ultimately take responsibility for the payment of an invoice if the factoring company cannot collect payment from the debtor (the customer’s client).
- Non-Recourse Factoring: With this type of factoring, the factoring company assumes most of the credit risk for collecting on an invoice. Some factoring firms offer both recourse and non-recourse options.
There are usually stipulations tied to non-recourse factoring, which typically has a higher factoring rate, so make sure you understand exactly what the non-recourse terms are before choosing this option.