20 Sep How Does Invoice Factoring Work?
How Does Invoice Factoring Work? What Is It?
In this entry from OTR Solutions we’ll walk you through everything you need to know about invoice factoring such as:
- Invoice factoring basics
- What is invoice factoring
- How does invoice factoring work
- Invoice factoring rates
Read on now and learn everything you need to know about invoice factoring!
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. According to Randall Reilly, “over 4-year period, owner-operators who decided to factor their invoices are 30% more likely to still be in business when compared to those who do not factor.”
There is heavy competition in our industry, so you need to understand the basics of invoice factoring when deciding which factoring company is the best fit for your business. In this post, we are going to 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. So what is Invoice factoring? 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 cash flow 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.
How Does Invoice Factoring Work?
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: Book Loads
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: Submit Invoices
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: Get Paid
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 different types of funding options including direct deposit, bank wire, fuel card, and BOLT (funding within minutes).
Step 4: Continued Business
Depending on the invoice factoring company, the carrier can pick and choose which brokers or shippers they’d like to factor and continue to maintain direct relationships with the customers that they don’t. We notify your brokers when you tell us to!
OTR Solutions Invoice Factoring with OTR Capital
OTR Solutions Invoice Factoring – The Factoring Process
How does freight factoring work?”
Book Loads > Submit Invoices > Get Paid
It really is that easy when you choose to factor with OTR Solutions!
Get started now and get paid now! Get started now!
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 out the basic requirements of all factoring companies below.
- Active operating authority (Motor Carrier and/or DOT number) authorized by the FMCSA to haul commercial motor freight.
- Some carriers with alternate forms of financing such as traditional bank lines of credit, do not take advantage of factoring, but many of our clients still utilize other forms of financing alongside our service.
- 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 The Typical Invoice Factoring Rates?
Wondering what the invoice factoring rates typically are? Don’t worry, we’ve got you covered – but first, you need to understand how factoring companies charge for invoices. 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 are paying for. We have put together a list of common additional fees that we have come across when studying our competitors.
Traditional invoice factoring fees across the industry include but are not limited to:
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.
PS: OTR Solutions only charges you $1 per ACH direct deposit.
Invoicing Processing Fees
Additional fees that your factoring company charges to send the invoice to the broker.
Additional fees to audit the paperwork, and process payment. This is separate from the fee above.
Additional fees to scan the paperwork the factoring companies need to get you paid.
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.
Extra Invoice Factoring Rates Add Up – Why Not Save Instead?
When you have these hidden rates fees, your rate quickly starts to add up. That’s why it’s important to understand all the fees that the factoring company can charge you.
When you factor with OTR, the only additional fee you will see with our program is a $1 ACH Direct Deposit or $30 same-day wire. We eliminate all additional processing, sign up, and monthly minimum fees so what you see is what you get.
Get started with invoice factoring today!
With OTR Solutions you not only get to save on the outrageous fees but you get access to industry-leading tools designed for brokers and truckers alike. You’ll get access to our awesome tools and services such as:
- Mobile app
- Lumper fee advances
- Fuel advances (Capital Fuel Card)
- Bolt (Get paid instantly)
- Awesome back office support
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 that we have seen through the years added in contracts. It’s easy to miss some of the important terms and conditions but then you find yourself locked into a difficult situation to get out of.
Since you are signing an agreement and making a commitment to the factoring, you need to be confident that the partner that you are signing with is trustworthy and will continue to stand behind the promises that they have made 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
- Unfair termination fees
- Hidden fees/additional fees
- Monthly minimum volume requirement
- Startup fees
- Chargeback or recourse date
- Reserve/advance rate
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 space. Factoring companies are required to enter a contract with your business to protect their interests 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 the additional fees that we mentioned earlier in the article that may be tacked on after an invoice is 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 cash flow.
They 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 the factoring companies’ fault.
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.
OTR Solutions Invoice Factoring – Signing A Contract
What Value Does Invoice Factoring Provide?
When understanding the process and benefits of factoring, you need to look at how it’s going to help your business long-term.
While the fee that you are charged is important, it shouldn’t be the only major influence in your partnership decision. It is just as important to understand what other resources that the company can offer to help you run a successful and profitable business.
Values you need from your invoice factoring company:
- Increased Cash Flow
- Back Office Support
- Protection from High-Risk Customers
- Industry-Leading Resources and Partnerships
Increase Cash Flow
This is the number one value add that invoice factoring provides for your business. Factoring your receivables puts cash back into your business quickly to allow you to accelerate your growth. The flexibility of factoring provides easy access to capital to fund all the needs and expenses of your business.
Specialized Back Office Support
Partnering with the right invoice factoring company can be a game-changer for your accounting operations. 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 that you can trust will open opportunities to devote more energy and key resources to the core of your business.
Let OTR Solutions handle the back office while you focus on growth!
Protects You 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 customers that may not have the ability to pay for the work you’ve completed.
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 regardless of the need.
Opportunities And Obstacles Of Invoice Factoring
While every business is different, the opportunities and obstacles vary for each. Below are some of the major ones that we hear 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 are hiring them to perform. They become an extension of your business and oftentimes 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 and can make or break 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 a fast-paced industry.
Obstacles of Invoice Factoring
Read the Contract
We couldn’t stress this enough. You must read the contract to understand what you are 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. This means you need to read online reviews, check with your peers in the industry, and ask the right questions to your sales representative.
We’ve mentioned it before but if you missed it, read our guide on “How To Find The Best Freight Factoring Company”. Yes OTR Solutions is an invoice factoring company and we are prideful in doing the best jobs possible, but outside of all of that – the variables still apply to any business whether you decide to factor invoices with OTR Solutions or not.
The Difference Between Invoice Factoring Companies
There are hundreds of factoring companies across the United States but not one of them is alike. 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 will vary from factor to factor. Therefore, it’s important to read the contract before you sign anything.
Make sure to look for a factoring partner who is going to support you in your business regardless of your size.
Make sure that you choose a factoring company who can meet your current needs but also grow alongside you.
Many factors are just a cash flow solution, which can be great, but there is so much more out there.
Look for all the additional products and services that a factoring company has to offer.
- Do they have a fuel card?
- Can they help find freight?
- Are they dedicated to your success?
There are also a lot of invoice factoring companies that service other industries but with the complexity of the trucking industry, a partner that is experienced in this space can make all the difference. You should want to partner with an invoice factoring company that truly understands you and the industry that you operate in. Whether you need a freight factoring company, or another factoring company – consider all these variables.
Which Invoice 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 are choosing the right company to handle your finances.
With OTR Capital, 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.
We have a dedicated team that handles your account. That means that you will have someone who knows your account and your business.
Through other companies’ market non-recourse, OTR Capital has the only true non-recourse program. We take full liability of your invoices and handle all the collections on your behalf.
Ready To Get Started With Invoice Factoring?
For almost a decade, OTR Solutions has become one of the leading companies in this 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.
We’re here to provide you with the best value possible.
Get started with freight invoice factoring today!