9 Questions to Ask When Comparing Trucking Factoring Companies

What to ask before choosing a factoring company

In the U.S., trucking generates $255 billion in revenue each year. According to American Transportation Research Institute., there are 500,000 trucking companies, but only 4 percent of the trucking companies have more than 28 trucks. The other 96 percent have 28 trucks or less, and 82% have 6 trucks or fewer. So, trucking is a multibillion dollar industry comprised mostly of small, independent operators.

Many of these smaller trucking companies find it harder to access bank loans or wait the 30 to 90 days it takes to collect on invoices. Freight factoring is one way to eliminate these obstacles, especially for smaller trucking companies or independent operators. You've likely heard of factoring, and it is basically a way to create cash flow immediately instead of waiting to collect on all your invoices. The freight factoring company pays you 85 percent or more upfront and then collects the invoice payments for you. Once the payments are collected they send you the rest of the payments, less a factoring fee. The fee normally runs from 1 to 3 percent of the dollar amount factored.

Many factoring companies specialize in trucking/transportation/freight forwarding, but the details of their proposals may vary widely. The number of options and the structure of the various agreements can get confusing, so here’s an overview of what to look at when comparing factoring companies.

How quickly can you get funding?

Typically you’ll receive funding after your invoices are received. Some factors provide same–day funding or next-day funding, while others will only fund after verifying your customer’s bills, which can take more than 2 or 3 days.

What kind of service does the company provide?

You need to find out if the factor is hard to get in touch with or if you easily access a live representative with questions or concerns. Do your homework before you set up a long-term arrangement.

Does the factoring company provide credit protection?

There are two kinds of factors, non-recourse and recourse. Recourse factors have the option of charging you back for any unpaid invoices, but the non-recourse factors provide credit protection. This means that you will get paid on the invoice even if the invoice goes unpaid. Since they take on more risk, non-recourse factoring normally costs more.

How much is advanced and how much is held in reserve?

Factoring companies normally provide 85 percent or more in advance and then hold the remaining amount in reserve. The reserve is paid out less the factoring fee once the invoices are paid.

What are the rates and fees?

Factoring rates and fees may vary from company to company based on sales volume, number of invoices or customers, contract period, time before invoice is paid, recourse or non-recourse factoring and other variables. The best way to compare proposals is to figure out the total cost of the fees as a percentage of the dollar amount of the factored invoices.

How are credit checks carried out?

Many factoring companies will check the credit of the customer, shipper or freight broker for you. You need to find out how this is done and how long it takes. You’ll likely want to work with a factor that can quickly approve your customer’s credit and your funding before you transport a load.

How much of the billing is handled by the factoring company?

One of the advantages of working with a factor is that some perform the back office tasks like billing and invoicing. For example, you can send them the bill of lading and a rate sheet and they’ll take care of the rest. Other factoring companies will ask you to do the invoicing and send them copies.

What are the invoice requirements?

You’ll need to find out if the factoring company requires you to factor all your invoices or lets you choose the ones you want to factor. Also, some factors charge fees on the gross amount factored, while others charge you for the net amount (gross amount minus fuel costs).

What is the contract period?

Some freight factors may require a long-term contract from 3 to 36 months, but others will offer you the option of canceling your factoring agreement at anytime. Make sure you understand the fine print and any fees associated with terminating your contract early if you decide on a longer-term contract.

If you have any questions or you’re ready to proceed with factoring, contact us or sign up today!

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