Invoice Factoring: Fees, How It Works, and Finding the Right Company
Factoring invoices has become common practice in the trucking industry over the last few years and has shown a direct correlation to carrier success and long-term sustainable growth.
There is heavy competition in our industry, so it’s important to understand the basics of invoice factoring when deciding which factoring company will be the best fit for your business. In this post, we answer some common factoring questions including what to look for when choosing a factoring partner, invoice factoring fees, and the standard process.
What Is Invoice Factoring?
You may have heard about factoring before, but we want to make sure we cover the basics. Invoice factoring is the process of selling your invoices to a third-party company at a small discount. By selling your invoices to a factoring company, you speed up your cashflow and provide immediate capital to help support the day-to-day operations of your business.
Most invoices are paid on NET terms, with the most common being NET-30, NET-60, or NET-90. Instead of waiting out that time and having to keep track of what has and hasn’t paid, you can partner with a factoring service that will fund your invoices the same day/next day and take care of collecting on payments. Invoice factoring creates a consistent influx of capital that can be put back into the business to help sustain operations and drive future growth.
What Is the Process of Invoice Factoring?
Even though factoring is common inside the trucking industry, the process can become complicated, so we’ve provided a visual to help walk through it.
Step 1: A trucking company books a load through a freight brokerage or direct shipper. Once the load is delivered, the driver submits the Rate Confirmation, signed Bill of Lading (BOL), and any additional load documents to their factoring company. This gives you more time to hop on the next load instead of having to invoice multiple different customers directly.
Step 2: The factoring company audits the submitted invoice, notifies the carrier of any issues, and submits the invoice to the broker/shipper for payment.
Step 3: The factoring company then pays the carrier on their invoice the same day/next day depending on the carrier’s preferred funding option. At OTR Solutions, we offer multiple types of funding options including direct deposit, bank wire, fuel card, and BOLT (funding within minutes).
Step 4: Depending on the invoice factoring company, the carrier can pick and choose which brokers or shippers they’d like to factor and maintain direct relationships with, as well as the customers that they don’t want.
What Are The Requirements For Invoice Factoring?
The requirements needed to start factoring widely depend on the factoring company you decide to go with, but we have listed the standard requirements of all factoring companies below.
- Active operating authority (Motor Carrier and/or DOT number) authorized by the FMCSA to haul commercial motor freight.
- Customers that your factoring company can approve for factoring.
- Most freight brokers, or shippers, with NET pay terms, good payment history, and acceptable business credit can be approved by your factoring company.
- Brokers and shippers who pay cash on delivery, have a poor payment, or have poor credit history are not likely to be good candidates for factoring.
Want to learn more about the factoring process with OTR?
What Are Typical Invoice Factoring Fees?
Factoring companies charge a percentage of the invoice amount for their services. Many factoring companies will also charge various “additional fees” on top of the factoring percentage to help advertise a lower upfront rate. These fees can add up quickly and have a major impact on the effective rate that you’re paying for.
We have put together a list of common additional fees that we have come across when studying our competitors:
Traditional factoring fees across the industry include but are not limited to:
- Tiered Rates – Added fees based on how long the customer or broker takes to pay the invoice.
- High Direct Deposit/ACH Fees – Factors may charge upwards of $10 per ACH.
- Invoicing Processing Fees – Additional fees that your factoring company charges to send the invoice to the broker.
- Processing Fees – Additional fees to audit the paperwork and process payment. This is separate from the fee above.
- Scanning Fees – Additional fees to scan the paperwork the factoring companies need to get you paid.
- Collections Fees – Additional fees for each call/follow up that the factoring company makes on behalf of the carrier.
- Monthly Minimum Fees – Additional fees if the carrier doesn’t meet their monthly volume requirement.
When you have these hidden fees, your rate quickly starts to add up. you have these hidden fees, your rate quickly starts to add up. That’s why it’s important to understand all the fees that a factoring company can charge you. When you factor with OTR Solutions, the only additional fee you will see with our program is a small ACH Direct Deposit fee, or competitive expedited funding options for instant deposits with BOLT. We eliminate all additional processing, sign-up, and monthly minimum fees, so what you see is exactly what you get.
What To Consider When Signing an Invoice Factoring Contract?
We always say, “if the rate sounds too good to be true, it likely is.” All factoring companies have a contract, and every single one has a period that you must commit to that factoring company. There are countless tricks and hidden terms added into contracts, so it can be easy to miss some of the important terms and conditions.
When you sign an agreement and make a commitment to a factoring company, you need to be confident that the partner you’re signing with is trustworthy and will continue to stand behind the promises that they have made to you.
Let’s face it, we all know sales representatives are excited to close a deal and may forget to go over every important detail upfront. When reviewing your invoice factoring contracts, look over the following items in detail:
- Contract length – Many factoring companies will state that they do not require a contract, but there truly is no such thing as “no contract” in the factoring world. Factoring companies are required to enter into a contract with your business to protect their interests and and ability to collect on the invoices that they factor.
- Any contract that is longer than 12 months is not industry standard, and something to watch out for.
- We often see deceptive “short term” (30-60 day) contracts that renew for 12 months, so you see one contract length, but agree to another.
- Unfair termination fees –All factoring companies have a termination clause in their contract that will generally outline any fees that will be charged if you decide to end the contract earlier than the agreed-upon renewal date.
- These fees can get out of hand quickly, so make sure you understand exactly how they are calculated.
- Hidden fees/additional fees – Look out for any additional fees that may be tackled onto an invoice after it’s been submitted.
- Monthly minimum volume requirement – Many factoring companies will require that you factor a certain dollar amount of invoices each month to qualify for your rate, and will penalize you if you don’t hit that mark.
- You don’t want to be in a contract that requires you to factor all your invoices even when you don’t need the cashflow.
- Startup fees – A company may charge fees just to get your account set up to start factoring.
- Chargeback or recourse date – Many factoring companies require you to purchase your invoice back from them on a certain day, even if the issue was they factoring company’s fault.
- Reserve/advance rate – Some factors may hold an additional percentage, in addition to the factoring fee, when they fund your invoices. This could be used to charge invoices back, add on additional fees, and increase your factoring rate.
What Value Does Invoice Factoring Provide?
When understanding the process and benefits of invoice factoring, you need to look at how it’s going to help your business in the long term. While the fee that you’re charged is important, it shouldn’t be the only major influence in your partnership decision. It’s just as important to understand what other resources the company can offer to help you grow and sustain your trucking business:
- Increase Cashflow – This is the premiere value that invoice factoring provides for your business. Factoring streamlines your cashflow, so funds enter your account quickly, letting you focus on your business’ road ahead.
- Specialized Back Office Support – Partnering with the right invoice factoring company can be a game-changer for your business. A factoring company’s core focus is on the day-to-day back office needs of its clients. Outsourcing your billing, collections, and credit efforts to a partner you can trust will open opportunities to devote more energy and key resources to the core of your business. Let us handle the back office while you focus on growth! Protection from High-Risk Customers – We are constantly tracking the payment history and credit health of all brokers and shippers that we work with. Our goal is to protect your company from hauling freight with unreliable customers.
- Industry-Leading Resources and Partnerships – Your factoring company should be a true partner who can add value in all areas of your business. Look for a factoring company that has aligned itself with various tools and resources across the industry to provide solutions across the board.
Opportunities and Obstacles of Invoice Factoring
While every business is different, the opportunities and obstacles vary for each. Here are some relevant opportunities and obstacles of invoice factoring we’ve heard from our clients:
Opportunities of Invoice Factoring
- Focus on Trucking – As an entrepreneur, you already wear multiple hats for your business. When you partner with an invoice factoring company, you can take advantage of all the resources they offer, so you can focus on the core of your business and its growth.
- Build Your Reputation – Factoring companies specialize in the services that you hire them to perform. They become an extension of your business, and often are the main contact for many of your brokers post-delivery. Prompt and accurate billing, professional communication, and quality service are all driving forces behind relationships with brokers that can influence your chances of winning repeat business from your favorite customers.
- Offset Back Office Cost – As your business grows, so will your team. For growing fleets, factoring becomes less expensive than hiring an in-house accounting and back office team. Factoring also allows your business to quickly adapt in this fast-paced industry.
Obstacles of Invoice Factoring
- Read the Contract – We can’t stress this enough. You must read your contract to understand what you’re signing up for. Money is such a personal thing; make sure the company you are doing business with is transparent with the full process.
- Partner with a Trustworthy Company – There are so many competitors out there trying to win your business. Do your research on the company. Read online reviews, check with your peers in the industry, and ask the right questions to your sales representative to make sure you’re partnering with a reliable invoice factoring company.
The Difference Between Factoring Companies
There are hundreds of factoring companies across the United States, and no two are identical. There are also thousands of trucking companies that all need different services and resources for their operational success. You need to understand the benefits of factoring and which services your business can benefit from the most.
Factoring companies market various freight factoring programs such as Non-Recourse, Recourse, and Hybrid programs, but the terms and benefits of these programs vary from factor to factor. Therefore, it’s important to read the contract to know exactly what you’re signing up for.
Make sure to look for a factoring partner who is going to support you and your business, regardless of your size. Choose a factoring company that can meet your current needs, but also grow alongside you. Many factors are just a cashflow solution, which can be great, but these companies can offer so much more than that. Look for all of the additional products and services that a factoring company advertises. Do they have a fuel card? Can they help you find freight? Are they partnered with reliable industry organizations? Are they dedicated to your success?
While some factoring companies serve industries in addition to trucking, it’s important to have a factor that understands the unique complexity of the trucking world. Partnering with a factoring company that has experience in this space is vital to your business’ growth and success.
Which Factoring Company Should You Choose?
As we mentioned before, there are a lot of factoring companies to choose from. They can all sell the same service, but each factoring company is different. Money is personal, so you need to make sure that you’re choosing the right company to handle your finances.
- No Hidden Fees – With OTR Solutions, what you see is what you get. We include everything upfront in the contract, which means that you won’t be surprised by any new fees.
- Back Office Support – We have a dedicated team that handles your account. That means that you’ll have consistent communication with your account manager that knows you and your business.
- True Non-Recourse – Though other companies market non-recourse factoring, OTR Solutions has the only true non-recourse program. We take full liability of your invoices and handle the collections on your behalf, so you can focus on the road ahead.
OTR Solutions has become one of the leading companies in the trucking industry by offering a simple, quality, and competitive service. We smashed the stigma commonly associated with factors and proved that factoring could be a valuable product for new ventures, growing companies, and well-established fleets alike.
Want To Get Started?
More of a video person? We gathered team members from every corner of OTR Solutions to take you on a journey through invoice factoring! We break down everything you need to know about choosing the right factor and more!