Should New Authorities Use Factoring?
Factoring is one of the most debated topics among new trucking authorities. Some carriers swear by it; others avoid it completely. Understanding how factoring works, its true costs, and when it makes sense helps you make an informed decision for your business.
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What is Freight Factoring?
Factoring is a financial service where a factoring company purchases your invoices at a discount and pays you immediately. Instead of waiting 30-45 days for broker payment, you receive funds within 24-48 hours.
The factoring company then collects payment from the broker. Their fee—typically 2-5% of the invoice—is their profit for providing immediate cash and handling collections.
How Factoring Works
- You complete a load and submit the invoice to your factoring company
- The factoring company verifies the load and broker
- You receive 90-97% of the invoice amount within 24-48 hours
- The factoring company collects full payment from the broker
- Any reserve held is released (minus fees) after broker pays
Pros of Using Factoring
Immediate Cash Flow
Get paid within days instead of waiting 30-45 days. Critical for covering fuel, insurance, and operating expenses.
No Collections Headaches
The factoring company handles chasing payments from slow-paying brokers.
Broker Credit Checks
Most factoring companies verify broker creditworthiness, protecting you from bad payers.
Easier to Qualify Than Loans
Factoring is based on your invoices, not your credit score or business history.
Cons of Using Factoring
Ongoing Fees
2-5% per invoice adds up. On $100,000 annual revenue, that's $2,000-$5,000 in fees.
Contract Requirements
Many factoring companies require minimum volumes or long-term contracts.
Hidden Fees
Some companies charge application fees, monthly minimums, wire fees, and other hidden costs.
Reserve Holdbacks
Companies hold 3-10% of invoices until broker pays, tying up some of your money.
When Factoring Makes Sense
Factoring is often most valuable in specific situations:
- Starting out – Limited cash reserves make waiting 30+ days for payment difficult
- Rapid growth – Expanding faster than cash flow supports
- Seasonal businesses – Bridging cash gaps during slow periods
- High-volume operations – When time spent on collections costs more than factoring fees
Alternatives to Factoring
- Business line of credit – Lower cost but requires credit history
- Quick pay options – Many brokers offer quick pay for 2-3% fees
- Cash reserves – Building savings to cover payment gaps
- Fuel cards with credit – Some fuel cards offer short-term credit
Our dispatch services team can help you evaluate factoring options and connect you with reputable companies that work well with new authorities.
Frequently Asked Questions
What's a good factoring rate?
Competitive rates range from 2-3% for recourse factoring. Higher rates (4-5%+) may be justified for non-recourse or additional services, but watch for excessive fees.
What's the difference between recourse and non-recourse factoring?
With recourse factoring, you're responsible if the broker doesn't pay. Non-recourse factoring means the factoring company absorbs the loss (higher fees apply).
Can I factor some loads and not others?
Some companies require factoring all loads. Others offer selective factoring with higher per-invoice fees. Read contracts carefully to understand requirements.
How long are factoring contracts?
Contracts range from month-to-month to 2+ years. Longer contracts may offer lower rates but reduce flexibility. Consider your plans before committing long-term.
Disclaimer: Results vary based on carrier experience, equipment, lanes, and market conditions. The information provided is for educational purposes and does not guarantee specific outcomes.
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