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What is Freight Factoring

Whether you are a drayage driver, an owner-operator, or have a role in understanding the logistics of cargo logistics, you have likely come across the term “factoring.” Factoring in trucking refers to a process that helps maintain consistent cash flow for the carrier company, the party who is shipping the commodity. Transporting heavy weights can be an expensive business to maintain, from equipment maintenance to giving drivers the pay they deserve, not to mention all the logistics that happen behind the scenes. So when it comes to trucking, factoring can be a solution to stagnant cash flows and slow payments, making it a great addition to the trucking process in many cases. 

What is Freight

what is freight

Freight transport generally refers to the transportation of physical commodities, often in bulk. Traditionally, “freight” specifically refers to shipping goods overseas, but in this case, encompasses land and air transport as well. Freight transport now includes shipping goods through the use of ships, trucks, trains, and airplanes. Since freight includes land transportation as well, drayage counts as a method of transporting freight. Other modes of truck-based freight include less-than-truckload and intermodal trucking

Freight Factoring

In freight factoring, a transport company sells their invoice to a factoring company, being paid for most of the invoice upfront. The factoring company then collects the complete invoice. After that, the factoring company deducts a small percentage of the total invoice for their service fee. The rest of the invoice is returned to the freight company. Freight factoring is often a solution for stagnant or slow cash flows and can help take burdens off trucking offices.  

Here’s usually how the process goes: 

  • A transport company has a contract with a factoring company. 
  • Whenever a delivery is complete, the transport company sends a document confirming the rates of the delivery service as well as a Bill of Lading (BoL or BL) to the contracted factoring company. 
  • The factoring company confirms the shipment completion through a broker. 
  • Once the delivery is confirmed, the factoring company buys the unpaid invoice from the transport company. Usually, the payment is delivered through ACH, a wire transfer, or a fuel card. Payments are often completed within 24 hours. 
  • After paying the transport company, the factoring company handles the rest of the invoice collection process. A customer pays the full invoice directly to the factoring company. 
  • Once the invoice is closed, the factoring company calculates a small percentage from the total invoice for their services. The transport company then receives the remaining amount of the invoice the factoring didn’t originally buy, with the service fee already deducted.  

Benefits of Freight Factoring

Benefits of Freight Factoring

There are many reasons why a trucking or transport company will choose to incorporate factoring into their business practice. Having reliable cash flow is important to any industry, but it can be especially difficult to maintain for trucking companies. Even after the cargo is delivered after hours of labor and driving, invoices are often paid late. It can take 30-60 days to receive payment for a shipment. That’s a lot of time to go without having earned anything despite the work already completed. Working with a factoring company erases that wait.  

Having reliable cash flow is especially during times of unexpected changes, such as the rising price of shipping containers. It also ensures that trucking companies are being paid for their services quickly. In contrast to the slow payment of customers, factoring companies pay businesses often within 24 hours. 

There is also often a lot of effort and paperwork required to keep track of receivables. There is also the invoice collection process, which can be time-consuming. When a factoring company buys an invoice they are now responsible for invoice collection, nagging calls, frustration in the waiting, and all other factors. This means that for many trucking managers or operators, they can direct their energy and resources toward other demanding tasks. Factoring companies are a great way to take the strain off the office portion of trucking.  

Factoring Company

A factoring company is a company that works to buy another business or company’s invoice, especially if that business often has invoices that are paid late. Factoring companies buy an unpaid invoice from a company at slightly less than the full price. For example, if an invoice was $10,000, a factoring company may buy the invoice for $8500. The company the invoice is bought from gets the payment of the sale upfront. 

When the invoice is finally completed, the payment goes to the factoring company, because they were the party that bought the invoice. Before the remaining percentage of the payment returns to the business the invoice was bought from, the factoring company deducts a percentage of the total invoice for their services. Usually, this deduction is between 1 to 5 percent of the original invoice, but those values can change depending on the price of the invoice, the reliability of the customer base to follow through on their invoices, and other factors. 

The key purpose of the factoring company is to make sure businesses get paid quickly as opposed to waiting on the processing and payment of their clients. In the case that a customer does not pay their invoice, the original company is often held responsible for that debt.

Aside from trucking, factoring companies also often work for construction, healthcare, and telecommunication industries. 

A Reliable Shipping Company

Reliability is a key strength of any transport company, whether you’re a shipper looking to transport commodities, a driver looking for a strong company to drive for and reliably get paid, or a factoring company trying to decide which shipping companies are worth contracting with. Heavy Weight Transport is committed to delivering goods packages with lower costs and higher expectations. Our custom-made fleet coupled with our expertise in transporting heavy weight freight make us one of the best in the business. Drive for us or check out our drayage transportation rates today to get the best in reliability.