If you work in the trucking industry, you may have come across the terms “freight factoring” and “invoice factoring.” The terms are often used interchangeably. The fact is, there are important differences between the two.
In this article, we will delve into the details of invoice factoring vs freight factoring, compare their features, and explore which one may be more beneficial for your business.
What is invoice factoring?
Invoice factoring is a financial arrangement used by trucking companies and other businesses to improve cash flow. It involves selling your accounts receivable, or unpaid freight invoices, to a third-party factoring company at a discounted rate.
In exchange, the factoring company advances the invoice amount to the trucking company, minus the agreed upon factoring fee. The factoring company, called a “factor,” then collects the payment from the customer on behalf of the trucking company.
What is freight factoring?
Freight factoring, also known as transportation factoring or factoring loads, is limited to the transport industry. It also is used to improve cash flow, but instead of being based on accounts receivable, it’s based on bills of lading. Typically trucking companies are paid upon the successful completion of a job, but sometimes a factor will pay as soon as a driver picks up a load.
Although trucking companies can receive funding faster with freight factoring than invoice factoring, the downside is that it may cost more.
Invoice factoring vs freight factoring
While both freight and invoice factoring involve receiving cash advances from third-party companies to improve cash flow, there are some key differences. These points may impact which option is more suitable for your trucking business.
1) Freight factoring requires industry expertise
One of the biggest differences is that freight factoring requires specialized expertise from the factor. Freight factors specialize in serving the transportation industry and have a deep understanding of its unique challenges and requirements. They are familiar with industry-specific terminologies, regulations, and payment cycles, which allows them to offer tailored solutions to trucking businesses.
On the other hand, companies that only offer invoice factoring serve businesses across a wide range of industries. They may not have the same depth of insight into the trucking industry as a factor that provides freight factoring services as well.
If you decide that invoice factoring makes more sense for your trucking business, consider companies that also offer freight factoring. That way you get the best of both worlds: your preferred solution, from a company that knows your business well.
2) Freight factoring can improve cash flow before a job is complete
Another key difference between the two is that freight factoring enables you to receive payments even before finishing a job. When you need money for fuel to finish a job, for instance, this can be a critical distinction! Be aware, though, that you’ll likely pay a higher fee for factoring loads that haven’t been delivered yet. Regardless, if it keeps your truck running, it’s worth the price.
3) Freight factors often offer additional specialized solutions
Because freight factoring is specific to the transport industry, some providers offer additional solutions designed specifically for trucking companies. These may include, for instance, fleet fuel cards, equipment financing options or expedited asset-based loans.
They may also offer easy tech integrations with back-office systems commonly used by trucking companies to keep your life simple.
Some even offer up their industry-specific financial know-how, in the form of content resources they make available to customers. When comparing factors, it’s worthwhile to find out how they can facilitate your long term growth beyond factoring services.
Which type of factoring is best for your trucking business?
While both freight factoring and invoice factoring are similar in many ways, the distinctions are significant. Freight factoring is specifically designed for the trucking industry and offers more flexibility in terms of when you can be paid for jobs. It may be more suitable for smaller trucking companies or owner-operators.
Invoice factoring, on the other hand, is a more general form of factoring that’s used by various industries. It sometimes requires longer-term contracts with more complex fee structures. It may be a more viable option for larger trucking companies with high invoice volumes and established customer bases.
It’s essential for trucking companies to carefully evaluate their specific needs, financial situations and long-term goals when choosing between the two. Make sure you work with reputable factors, and review the terms and fees of factoring agreements carefully. As always, seek professional financial advice when needed.
Nearly all trucking businesses can benefit from factoring
Overall, when it comes to invoice factoring vs freight factoring, both can be effective for trucking companies seeking to improve their cash flow and finances. Understanding the similarities and differences between the two can help businesses make an informed decision based on their unique needs and circumstances.
Read more in our ‘Find a freight factor’ article series
- Invoice factoring vs freight factoring: Is there a difference?
- Pros and cons of freight factoring services
- Do regular banks handle factoring for trucking companies?
- Guide to choosing the best factoring company for trucking
FAQ
Invoice factoring is the process of selling outstanding invoices to an invoice factoring company for a small percentage of the receivables. You’ll get anywhere from 80% to 90% of the invoice value within 24 to 48 hours. You can use this money to fund your business.
With all types of invoice factoring, the factoring company is responsible for collecting unpaid or past-due invoices. With recourse factoring, you’ll still be responsible for the debt if it remains unpaid. With non-recourse factoring, the factoring company assumes responsibility for the debt, usually for a higher fee. Read Recourse vs non-recourse factoring to learn about the differences in detail.
Factoring is one of the most efficient ways to boost your cash flow. Many businesses can struggle to meet payroll and other expenses when payments are coming in up to 90 days later. As a result, businesses turn to invoice factoring for help but it’s important to fully understand what your contract entails. For more insight into factoring rates and fee schedules, read What is the cost of factoring?