Factoring is a way of life in trucking. There’s too much money on the line to wait 45 days on average1 to get paid, regardless if you’re an owner-operator or established logistics company. Competition for on-time delivery and damage-free freight is growing, and many companies are niching down to dedicated truck-loading with reliable shippers. Heck, some are even capitalizing on last-mile delivery services.
Companies like XPO are streamlining line-haul operations, opening distribution terminals at rapid pace, and establishing schools to pump out CDL drivers. To top it off, pallet networks are chopping up smaller OTR drivers into local operators with limited room for growth.
It all comes down to money → the faster you get paid, the faster you grow.
That’s where invoice factoring can help.
What is a factoring company in trucking?
A factoring company is a short-term financing partner who provides 95% to 99% of a receivable amount up front for the right to collect 100% of the receivable later (usually 30 to 45 days).
In trucking, factoring companies provide the equivalent of payment-on-delivery so owner-operators and companies can move on to the next delivery without a strain on their budget.
The image below illustrates how the three entities interact over three transactions, but it’s a slight oversimplification. The factoring company buys the receivable at a discount, but it also charges an additional percentage as protection against potential default. That percent is called a reserve.
When debtors pay on time, the reserve gets rebated to the company. If the debtor doesn’t pay, the factor keeps the reserve. This is a hybrid form of recourse, because it provides upfront collateral, even if that collateral is minimal.
True recourse involves subsequent coverage of unpaid debts by the company.
What does a factoring company do?
Factoring companies pool funds from investors and creditors to provide a working capital management solution to high-receivable-days businesses, including trucking, that consists of immediately purchasing one or more receivable contracts discounted by 1% – 5% and collecting 100% of the contract when the trade debtor makes the payment.
Who pays the factoring company in trucking?
The trucking company pays the factoring company, but this payment does not consist of transferred money; instead, it’s imply a 1 – 5% discount on the receivable that the company foregoes in order to receive cash upfront. The factoring company then pockets the difference between the discounted amount and the full amount when the trade debtor transfers the money.
For example, All Terrain Trucking delivers widgets to Superstore Inc. on January 1st at an agreed price of $1,000, payable within 30 days (the “receivable amount”). All Terrain Trucking doesn’t want to wait until January 31st to receive the money, so it sells the receivable amount to AA Factoring Inc. for $990, who wires the money on January 2nd. AA Factoring then collects the full $1,000 on January 31st, making a profit of $10 ($1,000 – $990).
Is factoring a loan?
No, factoring is not a loan because it is not a two-party relationship in which one provides funding and the other pays interest for it. Instead, it’s a three-party relationship where party 1 owns a right to money from party 2 during a given time (usually ~30 days) and party 3 buys ownership of the right for less than the original amount in order to collect the difference from party 2 at the end of the period.
The main difference is that a loan occurs between two entities whereas factoring occurs between three.
Do I need a factoring company for trucking?
There is no legal requirement to use factoring in your trucking business, just like there’s no obligation for a landlord to provide a refrigerator. But just as the landlord will struggle to get tenants without a fridge, you’ll likely struggle to grow without a factoring service (or other working capital financing).
Is factoring a good idea?
In short, factoring is a good idea when you want rapid growth, don’t depend heavily on intimate customer relationships, and don’t have financing needs outside accounts receivable.
If you aren’t in a growth phase, there’s no reason to forfeit profit to a factoring company. It’s to your advantage to be patient and wait for payment to come through.
Another reason to avoid factoring is customer relationships. If you depend on a small number of customers for business, the relationship matters. A factoring company will send a formal letter informing your customer that they’ve taken over — not the best way to maintain a relationship.
If you want to use factoring to solve tight cash flow problems, consider a more flexible and lightweight financing such as a line of credit that isn’t restricted to accounts receivable.
In other words, factoring is a good idea as long as you’re comfortable with
- Loss of profit equal to the discount you provide to the factoring company
- Loss of confidentiality because your pricing information goes out of house
- Transfer of customer communication to factoring company, which feels an awful lot like debt collection
- Labor intensive process because each agreement requires bundling accounts for the contract
- Solves only one problem, unlike alternatives such as a line of credit
- Pay attention to recourse clauses that require YOU pay if the original debtor shows bad faith
Common Complaints of Factoring Companies
- Unjustified reserve withholding
- Poor staff
- Inaccurate funding and rebates
- Treat clients poorly
- Signing over a customer for lifetime of relationship rather than on demand
- Placing liens on a company when debtor doesn’t pay
Is factoring worth it for trucking?
The short answer is that factoring is worth having as a backup financing solution you can use when you’re in a jam, but lines of credit and business credit cards usually offer cheaper rates for ongoing working capital management.
How much do factoring companies charge trucking?
Factoring companies typically charge a 1% to 5% discount and hold another 2% to 4% in reserve to protect against debtor default, which means they’ll withhold 3% to 9% total from the upfront payment and rebate 2% to 4% around 30 – 40 days later.
Other Fees to Watch Out For
In addition to the discount, factoring companies may charge fees for other services. Here are some examples you should look out for in the contract before you sign.
Tiered Rates. These are fine print fees that factoring companies can charge if the debtor takes longer than a written amount of time to pay up.
High Direct Deposit/ACH Fees. Factoring companies can charge flat fees for deposits. Usually they hover around $10 but can go higher, so make sure you read for these.
Invoicing Processing Fees. This is quite frankly a silly fee that factoring companies can charge just for sending the invoice to your debtor.
Processing Fees. Fees just to process your paperwork. Another silly on you should negotiate out of.
Scanning Fees. Fee applied to scan documents in order to pay you.
Collections Fees. Fees applied each time the factoring service has to contact the debtor.
Monthly Minimum Fees. A fee applied each month the debtor is late on payment.
Do you need good credit for factoring?
Because the risk of default on accounts receivable lies with your customers and not your business, you don’t generally need good credit for factoring. That said, factoring companies each set their own credit review standards so it’s best to ask in advance if they will investigate your and your customers’ creditworthiness.
I would like to get you the information myself but unfortunately factoring companies are not financial institutions and don’t have the same transparency requirements as banks and credit unions.
How do I get out of a factoring contract?
Factor agreements are not loans, so you’re not locked into a payment schedule based on a contract that’s highly regulated by law. In fact, only in 2022 is factoring coming under scrutiny, and only in California. That said, you still sign a contract and have to hold up your end of the bargain. To see an example factoring agreement, check out this one that was filed with the SEC.
After sampling 8 factoring agreements, we found that the typical contract takes one of two forms: (1) a 12 – 18 month duration that can be terminated with 60 days notice, or (2) undetermined duration that can be cancelled at any time provided accounts funded before termination are materialize for the factoring company.
The key points to look out for in a factoring contract, especially when it comes to termination, are:
- Scope of accounts covered: does it include ALL your receivables, or only those specified?
- Contract length: is it a fixed duration of control, for example 1 year, or open ended?
- Termination: can you cancel at any time or only before fixed duration end?
- Credit risk ownership: does the factoring company suffer if debtor doesn’t pay (non-recourse), or do you have to cover it (recourse)?
- Minimum fees: is there a minimum factoring amount per period, such as $500k, that will be invoiced if discounts do not cover it? (See below for example.)
- Termination fees: does termination require some form of compensation?
“If the actual factoring fees or charges collectively paid to us…are less than five hundred thousand dollars ($500,000) in the aggregate (“Minimum Factoring Fees”), we shall charge your account as of the end of such Period with an amount equal to the difference between the actual factoring fees or charges paid during such Period and said Minimum Factoring Fees.”
Example Credit Factoring Agreement Minimum Fees Clause
Non-recourse vs Recourse Factoring
One last point before we look at the best factoring companies: who’s responsible if your customers don’t pay?
Factoring agreements fall under two major categories. Non-recourse contracts ensure the factor has no recourse to pursue the company in the case trade debtors (aka customers) don’t pay their debts. In a written agreement, the terminology for this is credit risk. Recourse agreements stipulate that the factor maintains a right to recourse if customers don’t pay; in practice, they can put a lien on the company if this occurs.
The knee-jerk reaction is to always use non-recourse agreements, but let’s think about it. Compensation has an inverse relationship with risk, i.e when you take more risk, you make more money, and vice versa.
If you have very stable customers who always pay, just late, then a recourse agreement will result in a smaller discount to the factor company. The inverse is also true. If your customers are unstable, then it’s obviously to your advantage to take a non-recourse agreement.
Key Point
The key point is this: you know your customers better than the factor, which gives you insight to minimize costs via recourse agreements when it makes sense.
What’s the best factoring company for trucking?
| Company | Our Rating (of 10) | Best for… |
|---|---|---|
| C2FO Read Review → | 9.99 | Overall |
| FirstLine Funding Read Review → | 9.98 | Flat rate pricing |
| Carriernet Read Review → | 9.95 | Minimal contract requirements |
| Porter Freight Funding Read Review → | 9.86 | Fee transparency |
| altLINE Read Review → | 9.70 | Owner-Operators |
| Apex Capital Read Review → | 9.16 | Fuel credit line ($2,500) |
| OTRSolutions (formerly OTR Capital) Read Review → | 7.53 | Back Office Support |
| E Capital Read Review → | 7.33 | Price (Discount) |
| Truckstop Factoring Read Review → | 4.73 | No minimum volume requirements |
| RTS Inc. Read Review → | 4.41 | Operational Software |
C2FO
Best Overall
C2FO is different than your usual factor. Instead of collecting and evaluating your individual clients, they have a long list of common large customers including Amazon, Best Buy, and Costco that they leverage to provide zero-discount funding via a Visa Cashflow+ card.
C2FO funds the card against your receivables at no cost or discount. Instead, you pay a 1% ACH transfer cost in case you need to redistribute the funds. But it’s not required.
| Our Rating: | 9.72 / 10 |
| BBB Rating: | 5.00 / 5 |
| TrustPilot: | 4.70 / 5 |
FirstLine Funding
Flat rate pricing
FirstLine Funding is one of the best rated trucking factors online, and it prides itself on providing flat rate pricing. You can get up to 100% in advance funding, fuel cards, and 24/7 customer service. Funds get deposited within 1 day, and if you ever have problems, your personal account manager is always there to help. There’s a reason FirstLine has an A+ BBB Rating.
| Our Rating: | 9.98 / 10 |
| BBB Rating: | 5.00 / 5 |
| TrustPilot: | Not rated |
Carriernet
Minimal contract requirements
Carrriernet has built a strong reputation for simplicity and transparency. A quick look at their website shows they’re one of the more digital-friendly factors in the market, evidenced by a mobile app. Submit invoices digitally and get paid the same or next day. They’re also in the logistics optimization game and provide tracking software to help you get more bang for your miles driven.
| Our Rating: | 9.95 / 10 |
| BBB Rating: | 5.00 / 5 |
| TrustPilot: | Not rated |
Porter Freight Funding
Fee transparency
Porter Freight Funding does a good job with transparency on its pricing. Like any financing solution, factors often produce “hidden” fees over the course of your relationship, but Porter is up front about all of them. They work with fleet owners and freight brokers and provide tag-on services such as fuel cards and dispatching services.
| Our Rating: | 9.86 / 10 |
| BBB Rating: | 5.00 / 5 |
| TrustPilot: | Not rated |
altLINE
Owner-Operators
altLINE is a service provided by The Southern Bank Company that provides invoice factoring to over 10 different industries, including trucking. altLINE has a full-fledged bank behind its factoring operations and has been in business over 80 years. There customer reviews are strong, and they’re altogether a strong candidate for your business.
| Our Rating: | 9.70 / 10 |
| BBB Rating: | 5.00 / 5 |
| TrustPilot: | 4.70 / 5 |
Apex Capital
Fastest
Apex Capital developed a proprietary blynk® payment system that can get you paid in minutes, not days. They have strong customer service, non-recourse agreements, and fuel credit lines from $2,500.
| Our Rating: | 9.16 / 10 |
| BBB Rating: | 4.86 / 5 |
| TrustPilot: | 4.30 / 5 |
OTR Solutions (formerly OTR Capital)
Back Office Support
OTR has been a heavyweight in the trucking factor space for a long time. They’re well established and extensive. The problem is their growth has led to diminished customer service, though not entirely.
They also provide a website building solution called ELEVATE, which is pretty neat.
| Our Rating: | 7.53 / 10 |
| BBB Rating: | 3.33 / 5 |
| TrustPilot: | 4.20 / 5 |
E Capital
Least Expensive
While factors are infamous for maintaining confidentiality over their price structures, reviews across multiple websites suggest eCapital has one of the lower discount requirements in the business. In addition, they have strong transfer services that make migrating from your current provider very easy.
| Our Rating: | 7.33 / 10 |
| BBB Rating: | 2.83 / 5 |
| TrustPilot: | 4.50 / 5 |
Truckstop Factoring
No minimum volume requirements
Truckstop factoring is another digital-friendly option. They don’t have minimum volume requirements like many other factors, which means anyone can get approved. That said, customer service is not the best so weight the options carefully.
| Our Rating: | 4.73 / 10 |
| BBB Rating: | 1.33 / 5 |
| TrustPilot: | 3.40 / 5 |
RTS Inc.
Operational Software
Along with OTR, RTS is one of the more common trucking factors today. But growth has caused them to neglect customer service. While they’re still a viable option, they’re the last option we would recommend.
It’s hard to beat C2FO’s zero-discount card option, but if you want something more traditional, try FirstLine or Carriernet.
| Our Rating: | 4.41 / 10 |
| BBB Rating: | 1.00 / 5 |
| TrustPilot: | 3.40 / 5 |
Worst Factoring Companies
These four companies have bad or very bad reputations for various reasons. One thing is sure: each of them has a tendency to be substandard towards you and your customers.
| Worst Companies | Our Rating | Justification |
| Royal | 6.00 | Aggressive with customers |
| TBS | 3.80 | Withholds reserves without explanation |
| TAFs | 3.24 | Manipulative tactics |
| Nuko Captial | 2.00 | Poor communication |
Conclusion
Choosing a factor for your trucking business is a big decision, and it may feel overwhelming when you weight it against other options like lines of credit and loans.
We’ve done a lot of research to bring you these options so you know you’re getting the best possible option for you.
At AnalystAnswers.com we review technology and financial products to help people like you make good decisions. We also teach data and financial analytics to help you make informed decisions in work and in life. Everyone has questions, we’ve got data-driven answers. Check out more by visiting our homepage.
