Freight Factoring

A financial service where a trucking company sells its freight invoices to a factoring company at a small discount in exchange for immediate payment.

Freight factoring is a cash flow management tool that allows trucking companies to get paid almost instantly instead of waiting the standard 30, 60, or even 90 days for a shipper or broker to pay. In a typical arrangement, the carrier submits a copy of the freight bill and signed proof of delivery to a factoring company (the 'factor'). The factor verifies the documents and advances a high percentage of the invoice amount, often between 95% and 98%, to the carrier within 24 hours. The factor then takes on the responsibility of collecting the full payment from the carrier's customer. Once the customer pays the invoice in full, the factor releases the remaining percentage to the carrier, minus a service fee. This fee, known as the factoring rate, typically ranges from 1% to 5% of the invoice value and is the factor's compensation for providing the service and assuming collection duties. There are two main types: recourse factoring, where the carrier must buy back an invoice if the debtor fails to pay, and non-recourse factoring, where the factor assumes the risk of non-payment due to the debtor's financial insolvency.

How it is calculated

(Invoice Amount * Advance Rate percentage) = Immediate Cash Advance

Example

An owner-operator completes a load worth $1,500 and submits the invoice to a factoring company with a 3% rate and a 97% advance. The factor immediately deposits $1,455 (97% of $1,500) into the carrier's account. When the broker pays the factor, the factor keeps its $45 fee (3% of $1,500) and the carrier has received its full advance.