Freight bill factoring is a form of financing that is commonly used in the transportation industry. It works by allowing carriers and brokers to finance their slow-paying invoices. Transportation companies use this type of financing to improve their cash flow and grow their businesses. In this article, we cover:
- What is freight bill factoring?
- How does freight factoring help you?
- How does it work?
- Differences by province
- How much does it cost?
- What are its advantages?
- Who qualifies for it?
1. What is freight bill factoring?
Freight bill factoring is a specialized factoring product that helps transportation companies with cash flow problems due to slow-paying shippers and brokers. This solution enables them to finance their invoices, which provides the working capital they need to pay for fuel, repairs, and running the business. More importantly, factoring provides trucking carriers with predictable cash flow, which provides a stable platform to grow the company.
2. How does freight factoring help you?
Factoring solves a common financial problem that truckers encounter. Most shippers and brokers ask that you give them net-30-day terms (or more) when paying an invoice. This is a common practice in the Canadian transportation industry.
This situation puts trucking carriers in a financing bind. They have many immediate expenses that must be paid, such as fuel, repairs, and salaries. However, the shipper will take 30 days or more to pay their invoice. The carrier’s only option is to pay for these expenses out of their cash reserves and replenish their reserves when the shipper pays. At a minimum, this strategy limits their ability to grow. It also leaves the company in an unstable financial position. A few delayed shipper payments could put the company in financial jeopardy.
a) Don’t quick pays fix the problem?
Some shippers and brokers offer “quick pays” to their carriers. A quick pay is the transportation industry’s name for the common practice of offering early payment discounts. Quick pays work as follows. The shipper agrees to pay the carrier quickly, in 10 days or less, if the carrier agrees to a 1% to 2% discount. Alternatively, the trucking carrier can wait until the invoice’s due date and receive full payment.
Quick pays are a great option that can work well. Their main limitation is that they are voluntary. The shipper offers them only when they work to their advantage. Shippers also tend to stop offering quick pays during challenging economic times, usually when you need quick pays the most. Consequently, they aren’t always reliable. Many truckers consider factoring their invoices if quick pays are not providing the financial stability they need.
3. How does freight bill factoring work?
Factoring works by partnering with a financial company that funds your invoices from creditworthy shippers. Most factoring transactions are not structured as a loan. Instead, the factoring company buys the financial rights to your invoices and pays you for them upfront. This payment gives you immediate funds to operate the business. The factoring transaction settles when the shipper pays the invoice in full, on their usual deadline.
There are two ways to finance a freight bill – a single-instalment transaction and a two-instalment transaction.
a) Single-instalment transactions
Single-instalment transactions are the preferred option for owner-operators and small carriers due to their high advances. Invoices are financed as soon as the load is delivered and the finance company verifies the details. The factor provides a single payment, called the advance, that’s deposited into your bank account. The advance in these transactions ranges from 95% to 97% of the invoice’s gross value. The factor keeps the portion of the invoice that is not advanced as a finance fee.
b) Two-instalment transactions
Two-instalment transactions are preferred by small carriers and by larger transportation companies due to their lower cost. The first instalment covers 90% of the freight bill and is advanced as soon as the load is verified. The remaining 10% is deposited as a second instalment once your shipper pays the invoice in full. The factoring fee is deducted from the second instalment, which settles the transaction.
4. Differences by province
Factoring transactions are secured by the financial rights of your trucking company’s accounts receivables. Consequently, the factor must file some information to secure their rights. There are two ways of doing this in Canada, based on where your company is organized.
In provinces that use Common Law (e.g., Ontario, Alberta, etc.), the factoring company performs a PPSA search to determine if your invoices are pledged as collateral to a lender. If the assets are clear, the factor registers/perfects their General Services Agreement. The process is different for carriers that are incorporated in Quebec. The province uses hypothèques to secure assets. Hypothèques are different than PPSAs and have their own process.
5. How much does it cost?
The cost of factoring your accounts receivables varies and is determined by the following:
- The volume you want to finance
- The credit quality of your invoices
- How long do your shippers take to pay their invoices
- Whether you want to use a single instalment or two instalment process
Average rates range from 1.5% to 3.5% per 30 days for two-instalment transactions. The rates can be pro-rated to handle shorter or longer time periods. Due to their higher advances, single-instalment transactions have a higher cost of 1.8% to 5% (flat fee).
6. Advantages
Factoring receivables offers several advantages to carriers. The most important one is that it provides financial stability to your company. It enables you to stop worrying about slow-paying clients and provides immediate funds to operate your company.
The facility is designed to grow with your company. It can adapt and increase as your haul more loads – as long as your invoices qualify for financing. This can be a significant benefit for companies that want to focus on expansion.
Lastly, qualifying for factoring is simpler than qualifying for conventional business financing. This option is suitable for new and growing transportation carriers.
7. Qualification
Qualifying for freight bill factoring is fairly simple. Most accounts can be set up in a few days. Your company must:
- Be established and licensed
- Have creditworthy shippers and brokers
- Not have major tax or legal problems
- Have unencumbered accounts receivable
Get more information
Are you looking for factoring? We are a leading factoring company and can provide high advances at low rates. For information, get an online quote or call toll-free (877) 300 3258.
Note: This article is not intended as legal or financial advice. Please consult legal counsel if you have questions.