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. 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. 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.
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 Capital, we offer different 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 continue to maintain direct relationships with the customers that they don’t. We notify your brokers when you tell us to!
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 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 are 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. 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.
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 – 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 tack 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.
- Startup fees – 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.
- 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 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.
- 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 us 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 often times 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.
The Difference Between 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 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 a factoring company that truly understands you and the industry that you operate in.
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 are choosing the right company to handle your finances.
No Hidden Fees – 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.
Back Office Support – We have a dedicated team that handles your account. That means that you will have someone who knows your account and your business.
True Non-Recourse – Though 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.
For almost a decade, OTR Capital 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.
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Learn more about our factoring process today and how it can help your business.