How Freight Factoring Works

Ezra Cabrera

April 16, 2019
factoring for trucking

Did you know that freight trucking is expected to comprise 78% of all freight deliveries by 2040? In fact, for that very reason, many aspiring business owners venture into the freight industry because there are so many opportunities for growth.

While the trucking industry is lucrative, it’s also capital intensive. What this means is, entrepreneurs in the trucking industry are constantly looking for ways to finance their business operations. Fortunately, there is a viable solution called factoring for trucking that is a valuable financial resource for freight forwarding companies.

Freight factoring (also known as trucking factoring) is a form of financing that enables trucking companies to trade in their pending invoices for immediate cash. Trucking companies often use freight factoring to bridge cash flow gaps as they wait for shippers or freight brokers to pay their dues. Factoring companies typically pay 80% to 90% of your total invoice value upfront. They will then remit the remaining balance (minus a small transaction fee) to you once your customer fully pays their invoice.

If you have a less than desirable credit history, factoring for trucking is a great way for you to secure financing. Unlike traditional loans, the qualifications of invoice factoring are based on the creditworthiness of your customers – not yours. If you have bad credit, invoice factoring may be your most affordable financing option. Check it out:

5 Steps in Factoring for Trucking Businesses

The entire freight factoring process can be summarized in five simple steps:

1. Send an Invoice to Your Customer

Before you can take on freight factoring, you need to send an invoice to your customers.

2. Submit Your Invoices to Your Chosen Factoring Company

You can choose between a large-volume factoring and low-volume factoring. With a larger volume factoring, you need to sell and assign all of your invoices to the factoring company. On the other hand, low-volume factoring is structured similarly to a line of credit where you have the option of selecting which invoices you want to sell.

3. The Factoring Company Pays Your Invoices

As soon as the factoring company approves your application, they will immediately pay you a percentage of your total invoice value, which is generally between 80% to 85% of the total value of your invoices.

4. Your Clients Remit Payment to the Factoring Company

Instead of sending you the payments, your customers pay their invoices directly to the trucking factoring company. However, there are low-volume factoring companies that allow you to collect payments from your customers as long as you consistently make regular monthly payments to them.

5. The Factoring Company Forwards the Remaining Invoice Balance to You

When your customers pay the balance of their invoice, the factoring company will immediately forward you the remainder – minus a small fee for services rendered.

How to Qualify for Freight Factoring for Trucking Companies

Qualifying for freight factoring is easier compared to more traditional forms of financing. This is because factoring firms are more concerned with the creditworthiness of your customers rather than your business’. After all, your customers are the ones paying the invoices, not you.

You will most likely qualify for factoring if your customers have excellent credit and history of payments. However, you should at least have a credit rating of 530, as well as a history in the business of at least three to six months. In addition, the invoices you’re planning to factor should have a due date within 30, 60, or 90 days.

Keep in mind that the qualifications for freight factoring vary from lender to lender, so be sure to talk to a financial expert and understand the terms of the loan before committing.

Applying for freight factoring is not as difficult or as complicated as it seems. Even though you need to submit the necessary business information, the application process only takes a few minutes. Online-based lending companies can even get you pre-approved within 10 minutes.

Once you qualified, you can receive the funds within 24 to 48 hours after your application has been approved. Some lending companies even allow you to immediately collect the money. Again, the arrangement varies from lender to lender, so it’s best to review everything and make sure that the terms work for you.

Speak with a Lending Expert to Know More About Freight Factoring

This is how invoice factoring generally operates on behalf of a trucking business. However, expect to see some minor differences depending on the volume factoring you choose. The terms and conditions of your invoice financing transactions depend on a number of different factors. It’s best to speak with a lending expert to know the exact details surrounding factoring for trucking companies.

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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