Everything You Need to Know About Trucking Business Factoring

a. What is factoring? 

Factoring for business in the trucking industry is a process that allows companies to sell their unpaid invoices to factoring companies for cash. In essence, it is an invoice factoring, also known as factoring receivables or account receivables factoring (ar factoring). This provides an alternative to waiting for bills to be paid, offering an immediate cash flow. Factoring services can be particularly beneficial for trucking companies that are just starting out and may not have the capital to pay for their next load until their previous load is paid in full. By factoring a load, the owner/operator has the opportunity to continue accepting loads while also growing the trucking business.

Factoring services may be advantageous in certain circumstances, as invoice payment terms can vary from 30 to 90 days depending on the customer. This can depend on factors such as whether you have direct shippers or truck drivers. Regardless of the situation, you may find that working with a factoring trucking company allows you to avoid lengthy waiting periods. Another benefit of factoring is that it can provide a steady source of cash flow without the need to incur any new debt from bank loans.

b. Reasons to factor? 

It would be advisable for a trucking company to have access to its working capital, as without consistent cash flow and financial bank loans, it may find it difficult to operate. This is particularly the case when working with clients who take a little longer to pay. It might be helpful for trucking companies to consider reaching out to a factoring company to get paid within 24 hours. 

This could help them stay ahead of the curve and manage all the costs associated with the industry. It is important to note that working with factoring companies does not create any debt for trucking companies. This is because factoring is not a loan, and therefore, there is no requirement to pay anything back. Additionally, factoring does not negatively impact a truck driver's credit.

It is our understanding that companies offering extra factoring services provide truckers with access to contacts within the trucking industry, which may help them to secure the highest-paying loads. It would be fair to say that the majority of trucking business factoring companies provide their clients with complimentary fuel cards for their trucking fleet. Fuel cards offer discounts at various locations, which can help drivers save money on each haul. Drivers would no longer have to worry about losing money on fuel while driving, and would be able to start saving more on their miles per gallon.

c. Get your money same or next day

It is possible that trucking companies of all sizes could benefit from factoring, as soon as they receive their first load. Having access to instant cash could allow trucking companies to fund their day-to-day operations and expand their small business operations. Here are some of the other key advantages of utilizing the services of a factoring company:

• Access to cash within 24 hours

• Allows you to find and take on more trucking loads

• Helps new trucking companies get started and grow

• 1-2 years contract duration

Factoring can be a valuable tool for many trucking companies looking to grow their business and maintain a steady cash flow. It is always beneficial to have access to working capital, regardless of the size of your business or your company’s revenue.

d. Typical contract is 1-2 years

It is important to note that factoring agreements often require a significant upfront investment from the factoring company. This can include credit checks, payment terms, and invoice processing and collection systems. Longer contracts allow the factoring company to recoup these initial costs over time.

It is also common for trucking factoring agreements to include volume commitments. This means that the factoring company agrees to factor a minimum number of invoices on a monthly basis. Longer contracts provide the factoring company with a sense of stability, allowing them to plan for a consistent volume of invoices to finance.

It is often the case that factoring companies tend to prefer long-term contracts for a number of reasons. 

• Firstly, long-term contracts may offer a more stable and predictable cash flow. 

• Secondly, long-term agreements provide factoring companies with the opportunity to better plan their funding and operations. 

• Third, it is worth noting that trucking factoring often requires close cooperation between factoring companies and trucking/transportation companies. Long-term contracts can help foster a sense of trust and understanding between the parties involved. 

• Fourth, longer contracts may help to mitigate the risk of client turnover for factoring companies. New clients may require time to become familiar with the company and establish credit, so long-term contracts can help to minimize the risk of losing clients and revenue.

e.  Factoring company will file a UCC lien against your business

We would like to bring to your attention the possibility that a factoring company may file a Uniform Commercial Code (UCC) lien against your trucking company for a number of reasons, primarily to secure its interest in the company's accounts receivable. 

When a business makes a factoring arrangement, they essentially sell their accounts receivables to a factoring company for immediate cash in exchange for their interest in those receivables. In order to protect its interest in those accounts receivables and to ensure priority in the event of bankruptcy or default, a factoring company may file a UCC lien on the business’s assets, especially its accounts receivables.

A UCC Lien offers a factoring company legal protection and gives it priority over other creditors in the event of a trucking company’s bankruptcy or default. It is worth noting that when a UCC Lien is filed, the factoring company’s security interest in a business’s accounts receivable is publicly disclosed. This helps to avoid any potential confusion or misunderstanding and makes it easier for all parties involved to understand the factoring agreement.

The UCC lien allows the factoring company to take steps to enforce its rights over the accounts receivable in the event that the business defaults or fails to pay. This may include taking legal action to collect unpaid debts or liquidating your accounts receivable to recoup funds.

In general, factoring companies may choose to file a lien against a trucking company’s assets, particularly accounts receivable, as a means of protecting their interests and rights in the event that the trucking company defaults or becomes insolvent.

f.  Recourse vs Non-Recourse contract

Non-recourse and recourse factoring both offer different benefits depending on your trucking company’s preferences.

1. Non-Recourse contract and costs

It is generally the case that the rate for non-recourse factoring is slightly higher than for a recourse agreement. One of the key considerations is the extent of liability that is assumed in the event that a client defaults or ceases operations. In a non-recourse agreement, the trucking company is not held accountable for returning the truck factor. For smaller trucking companies that might find themselves in a challenging position if they were charged back, this could be a significant advantage.

A non-recourse program does not require a reserve account. Once the trucking company has been funded, they will receive 100% of their freight bill, minus the factoring fee. For smaller trucking companies that may lack the resources to complete all the necessary paperwork, the factor will also assist with billing, invoicing, and collections from brokers and shippers.

In the event that a shipper or broker is unable to fulfill their financial obligations in a timely manner or at all, a trucking company is protected by a non-recourse factoring agreement. In the event that the trucking company is not reimbursed, the freight factoring company will assume all risks and losses.

In order to avoid working with bad debtors, many factors will credit check brokers before agreeing to work with them. Furthermore, if you choose to accept non-recourse factoring as a risk mitigation strategy, you may find that your fees increase. Furthermore, the factor will also be responsible for all back-office documentation, invoice processing, and collections.

2. Recourse contract and costs

It might be helpful to note that there are some subtle differences between a non-recourse and a recourse factoring agreement. Firstly, there is no upfront cost, as the trucking company assumes full liability in the event that a shipper or broker defaults. In the event of a missed payment, the trucking factoring company will not be held responsible.

Until the broker or shipper makes the payment, a portion of the total funding amount is held in reserve. The trucking factoring company has the discretion to determine how much is kept in reserve.

In a recourse factoring agreement, the trucking company typically handles all of the company's billing and invoicing. On the other hand, the trucking factoring company may occasionally provide a billing program as a recourse, taking care of invoicing and billing. It is the trucking company's responsibility to pursue unpaid freight brokers and shippers.

In the unfortunate event that a broker or shipper defaults on a payment, the trucking company will be held accountable under the terms of the recourse agreement. In most cases, a part is held in a reserve account until the factoring company is paid by the shipper or broker. This agreement allows a trucking company to provide billing assistance, but it is important to note that the trucking company is still ultimately responsible for collecting payments.

It may occur that, in the event that the broker ceases operations and leaves outstanding balances, the factoring company will bill you for any unpaid invoices. For instance, if you sent the factoring company a $10,000 invoice for the transportation services you provided to the broker, and they paid you $9,700, but if the broker ceases operations or fails to reimburse the factoring company, the $10,000 invoice will be refunded to your company. It is therefore possible that the next time you send an invoice for $10,000, the factoring company may choose to retain the funds and you may not receive them.  

g. If you want to leave early then you will pay a termination fee

It's worth noting that there can be differences in the fees charged by factoring firms. It is advisable to be fully aware of the fees before signing up with a factoring company to prevent any unexpected costs. It is also worth noting that a number of additional variables could potentially affect the calculation of a factoring rate.

• Application/sign-up fees: It is possible that you may have to pay an application or sign-up fee before you can build credit and goodwill with a factoring company. This fee also covers the time it takes them to evaluate your application and launch your partnership.

• Minimum required volume: It is possible that your trucking company may be required to pay a fee if they do not maintain a specific monthly volume, as per the terms of the factoring agreement.

• Advance fees: Some factoring companies may require an advance rate if your trucking company requires advance factoring.

• Termination fees: In the event that you choose to terminate the contract before its scheduled end date, some factoring companies may include a termination fee in the agreement that you will be responsible for paying.

It is advisable to avoid working with factoring companies that impose fees without prior notice.

h. Factoring company as your back-office 

On the other hand, a reliable factoring business will act as your support system for the duration of your partnership, handling the collection of funds from clients on your behalf in exchange for a fee. Furthermore, there are additional benefits. 

It is typical for freight companies to charge a 1.75–3% factoring fee on the invoice. Your transportation company will benefit from the following advantages in exchange for this money:

Collection Services: With regard to the factored invoices, the factoring company is responsible for obtaining payment from the company's clients. They handle the entire collection process, which includes following up with clients, scheduling calls, and addressing any issues that may arise, such as disagreements or overdue payments.

Assessment of Accounts Receivable: The factoring company considers the quality of the accounts receivable being offered for factoring as well as the creditworthiness of the company's clients.

Advance Funding: The factoring company typically pays the business in advance, usually between 70 and 90 percent of the amount of the accounts receivable that is being factored. This quick cash infusion helps to improve the business's cash flow.

Credit risk management: The factoring company may be willing to assume some of the credit risk related to the accounts receivable, contingent on the nature of the factoring agreement (recourse or non-recourse). In non-recourse factoring, the factoring company assumes the risk of non-payment. In recourse factoring, the business is still responsible for any unpaid invoices.

Customer Relationship Management: With regard to payments, questions, and disputes, the factoring company is available to assist the company's clients directly. They maintain formal connections with clients to ensure prompt payments and to address any questions or issues that may arise.

i. Finding a reliable company to work with in a sea of alternatives

It would seem that there are approximately 700 to 1,000 factoring companies operating in the United States, according to recent estimates. It is possible that this figure may vary depending on the sources and criteria used to count these companies. For instance, it is possible that the number of companies included may differ depending on whether small niche firms and those operating in very specific sectors are included. It is possible that some of them may not always act in an entirely honest or transparent manner.

Determining if a factoring company might have deceiving or unethical practices involves careful research and due diligence. First and foremost look for reviews on reputable platforms like the Better Business Bureau (BBB), Trustpilot, and Google Reviews. Be wary of consistent complaints about hidden fees, poor customer service, or deceptive terms.

While thoroughly examining the contract, look for any mention of hidden fees or charges that are not prominently disclosed. Common hidden fees may include application fees, due diligence fees, or monthly minimum fees. If the factoring company bases its fees on the PRIME rate plus a margin, they might frequently adjust the rate in ways that are not transparent. This can result in higher fees than initially anticipated. 

Some factoring companies might offer an initial low rate linked to the PRIME rate as a teaser. Once the introductory period is over, the rates might increase significantly. The company might reserve the right to adjust the margin over the PRIME rate at their discretion, leading to unpredictable and potentially higher costs. They might not promptly adjust rates when the PRIME rate decreases, effectively charging you a higher rate than necessary for a longer period. 

Consider whether a fixed rate might be more predictable and preferable to a variable rate linked to the PRIME rate. If you choose a variable rate, understand how often it can change and under what conditions. Request historical data on how the factoring company has adjusted its rates in relation to the PRIME rate over time. This can give you an idea of their practices and help you gauge potential future costs.

While watching for the reliable company to work with, check if the company has had any regulatory issues, lawsuits, or complaints filed against them. This information can often be found through online searches or by checking with state and federal regulatory agencies. Also, look for information on industry forums and from trade associations. Companies with poor reputations often have negative feedback within industry communities.

It is also important to feel how transparent a factoring company is in direct conversation. The factoring company should be willing to clearly explain all aspects of their services, fees, and terms without ambiguity. Assess their responsiveness and willingness to answer questions. Deceptive companies often avoid providing straightforward answers.

j. Why work with Capital MBS? 

Selecting the best factoring company to work with can be challenging, particularly if this is your first time doing so and you're unsure if factoring will be beneficial to your case. In such instances, it may be helpful to seek guidance.

At Capital MBS, we can assist you in identifying a suitable factoring company that offers competitive rates, excellent customer service, financing for equipment, insurance, and other services all bundled into one. We can help you find reputable factoring companies that specialize in the trucking industry by using industry databases and networks. We can then narrow down the list of potential companies based on their credit standing, reputation, and client testimonials, ultimately identifying the most reliable candidates. When it comes to selecting the optimal business solution from the vast array of factoring options, Capital MBS is here to assist you.