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What is load factoring?

Would you like a debt-free way to improve your cash flow? If so, load factoring may be the solution for your operation. 

But what is load factoring? Load factoring is sometimes also referred to as freight factoring, OTR factoring, or trucking factoring. But no matter what you call it, load factoring is a process that bridges the gap between completing loads and getting paid. 

Transportation companies can use load factoring to get the cash they need to make payroll, afford insurance, buy fuel, and pay for other business-related expenses. If this all sounds good so far, keep reading to learn even more about load factoring. 

How Does Load Factoring Work?

Customers expect prompt delivery, but they aren’t always as prompt when paying for your service. Many customers wait about 45 to 90 days before paying invoices. 

When a carrier partners with a load factoring company, they’ll get paid right away. A third-party freight factoring company will purchase the invoice from you at a reduced rate. In return, they’ll pay you immediately upon receipt of the invoice and then collect payment from the broker. 

Here’s how it works:

  • Carrier delivers the freight.
  • Submits paperwork to the factoring company
  • Get paid immediately
  • Carriers broker pays the factoring company

In addition to reducing your stress levels, the load factoring process can ensure that you and your employees are paid on time. 

Do I Need a Factoring Company for Trucking? 

You may think that it is a waste of money to pay someone else to do something you can do yourself. However, would you be able to get the customer or broker to pay as soon as the load is delivered? Probably not. 

What Are Factoring Fees in Trucking?

Load factoring companies want to make money, so they charge a fee for their service. The fees vary from one company to the next and are based on business volume. 

What Is a Good Factoring Rate?

Factoring rates range from 1.15% to 5% per invoice. Based on the factoring company’s terms, you will get a percentage of the invoice amount with no maximum limit. The rate for your company is determined by other factors such as the total volume of invoices and the credit standing of your clients.

Many factoring firms provide proportional rates for shorter-term periods. For example, the 1.5% rate could be prorated to 0.5% for ten days rather than the typical 30 days. Good factoring rates depend on the advance rate. The lower the advance rate, the lower the fee. 

What Are the Differences Between Factoring and Bank Loans?

In general, bank loans put you in debt for many years at high interest rates. A monthly bank loan payment on top of your other expenses can be quite burdensome. If you get behind, additional fees and interest are added, and your credit rating takes a beating.

With freight factoring, there are no monthly payments. Funding is fast and keeps cash flow steady, helping carriers pay bills on time and stay on the roads. 

Not to mention, most factoring companies offer credit checks on brokers. This can help you make financially sound choices when it comes to which loads you take. 

How Do I Choose a Factoring Company?

The load factoring business is highly competitive. You’ll want to compare companies to get the best rates, terms, and services. The best choice is a company with industry experience and excellent customer service. 

Ask the following questions and compare the answers before choosing a factoring company: 

  • How long have they been in the business?
  • What types of factoring do they specialize in?
  • What are their advance rates?
  • Do they offer fuel cards?
  • Are they experienced in working with logistics companies?
  • Do they charge aging fees?
  • Are there additional fees for setup or same-day pay?
  • What factoring rates do they offer?
  • Do they have maximums or minimums?
  • How long does it take to get started?
  • Are they well-funded?
  • Under what terms will I be recoursed?

On average, the set-up process typically takes a couple of days. 

Example of Load Factoring

Imagine an example factoring company called ABC Services. When ABC receives an invoice of $100,000 in total, then ABC will deduct its 2% factor fee, which is equal to $2,000. Then, ABC will pay $98,000 to the trucking company and then collect the full $100,000 from the carrier when the contract terms are up.

What Are the Benefits of Load Factoring?

Some benefits of load factoring include:

  • Pays you right away
  • Reduces accounting burden
  • Qualifies brokers for you with credit check 
  • Improve cash flow
  • Reduces stress about getting paid
  • Helps you avoid going into debt

Additionally, many load factoring companies offer fuel advances, equipment loans, or fuel cards. 

Immediate Cash Flow

Until an invoice is paid, you may not have enough funds to purchase fuel for the next load. You’re constantly playing a juggling act to keep everything paid and still have money to keep operating. 

Using a factoring company, you’ll could get paid within 48 hours or less, and the steady cash flow will simplify all aspects of your business. Factoring loads helps keep everything on track from month to month.

Reduced Accounting Burden

Factoring for truckers reduces the burden of accounting so you can focus on other tasks. You will no longer have to track invoices. The extra time you’ll gain is often worth the fee.

Qualified Brokers

If you can’t perform a credit check for a broker, your factoring agency can do it for you.

Simplified Payment Plan

Transportation factoring is a simple plan for giving truckers the operating capital they need. The plan works for brokers, owner-operators, and fleets. 

A System that Works

Factoring has been used throughout history as a means of financing. Today, it helps large and small trucking companies stay ahead of financial hardships. 

Disadvantages to Load Factoring

Although load factoring is beneficial in many ways, it does have a few drawbacks.

Potentially Higher Fees

With a flat fee arrangement, the fees remain at a fixed rate. However, factoring companies may use a tiered approach which gradually increases the fees. Make sure you ask about the company’s rate structure. 

Risk of Unpaid Invoices

Some factoring companies add “aging fees” if an invoice goes unpaid. The fee goes up the longer the invoice remains delinquent. You may end up having to refund the money they advanced for that invoice. 

Choosing the Wrong Company

Some load factoring companies impose unexpected fees, those fees may include:

  • Administration fees
  • Set-up fees
  • ACH transfer fees
  • Minimum volume fees
  • Client credit check fee
  • Termination fees

Make sure you read the contract’s fine print and ask about any additional costs.

Debt-Free Cash Flow Equals Peace of Mind

With load factoring, you can gain the working capital you need for daily operations. You’ll find load factoring to be a great solution for all cash flow problems, and the benefits of load factoring far outweigh the disadvantages.

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TAFS is More than Freight Factoring

As one of the industry leaders, TAFS assists trucking companies to increase cash flow with some of the lowest factoring rates in the industry and a 1-hour advance option.