Factoring is selling an unpaid invoice to a third company, called a factor, in exchange for most of the money now. The factor then collects the full amount from the customer when the invoice comes due.
In freight, it is how many carriers get paid within a day or two of delivery instead of waiting 30 days or more. If you run a brokerage, you deal with factoring on almost every load, even if you never use it yourself. This guide covers both sides.
How freight factoring works
The carrier delivers the load and collects the signed proof of delivery.
The carrier sends the invoice and paperwork to its factor, usually the rate confirmation, the bill of lading and the proof of delivery.
The factor checks the paperwork and the broker's credit, then advances the carrier most of the invoice value, often the same or next day.
The broker pays the factor, not the carrier, when the invoice is due.
The factor releases any reserve it held back, minus its fee.
The carrier gets cash to pay for fuel, drivers and insurance. The factor earns a fee for waiting and for taking on the collection work.
What it costs
The fee is a percentage of the invoice, usually a few percent. What decides it:
Volume. A carrier that factors more freight pays a lower rate.
Customer credit. Invoices billed to brokers and shippers with good credit cost less to factor.
Speed of payment. Some factors charge more the longer an invoice stays unpaid.
Contract terms. Minimum volumes, long terms and termination fees are common. They matter as much as the headline rate.
Other charges can appear on top: fees for bank transfers, for invoices that are not approved, or for leaving the contract early. A carrier comparing factors should ask for every fee in writing.
Recourse and non-recourse factoring
Recourse | Non-recourse | |
|---|---|---|
If the customer does not pay | The carrier has to pay the factor back | The factor absorbs the loss, in the cases the contract covers |
Fee | Lower | Higher |
What is usually covered | Nothing; the risk stays with the carrier | The customer's insolvency. Disputes over the load are normally excluded |
Suits | Carriers who know their customers' credit | Carriers who want protection from a customer failing |
Non-recourse does not mean no risk. Most contracts only cover the customer going out of business. If a broker short-pays because of a claim or a missing document, the carrier is usually still responsible.
Factoring, quick pay or standard terms
A carrier has three ways to be paid for a load.
Standard terms | Broker quick pay | Factoring | |
|---|---|---|---|
Who pays the carrier | The broker | The broker | The factor |
When | Often 30 days after the paperwork is received | Within a few days | Often the same or next day |
Cost to the carrier | None | A small percentage of the invoice | A percentage of the invoice, plus contract fees |
Commitment | None | Per load | Usually a contract covering all or most invoices |
Quick pay is a broker's own offer: the carrier takes a small discount for faster payment on that load. Factoring is an ongoing arrangement with a separate company.
How freight brokers get paid
A broker is paid by the shipper and pays the carrier. The difference is the broker's margin. Our guide to margin and markup shows how to calculate it.
The timing is the hard part. Shippers often pay the broker in 30 days or more. Carriers expect to be paid sooner. A growing brokerage has to fund that gap, which is why some brokers factor their own shipper invoices or use a line of credit.
What a broker must do when a carrier factors
Look for the notice of assignment. When a carrier signs with a factor, the factor sends its customers a notice of assignment. It tells you that payment for that carrier's invoices must go to the factor. From then on, paying the carrier directly does not clear the debt. You can be asked to pay again.
Record it where your team pays from. The remit-to details belong on the carrier's record, so the person paying the invoice sees them. This is part of what a good carrier packet collects.
Verify changes before you act on them. A letter saying a carrier has left its factor, or has new bank details, is a common fraud. Confirm a release with the factor, using a phone number you already hold, before changing where payment goes.
Keep the paperwork clean. Factors check the rate confirmation and the proof of delivery against the invoice. A clear rate confirmation and prompt documents mean fewer calls and fewer disputes.
Answer verification requests. Factors contact brokers to confirm a load is valid before they fund it. Quick answers help your carriers get paid, and carriers remember which brokers are easy to work with.
Keeping it organized
Most problems with factored invoices are record problems: the notice was filed in an inbox, the remit-to address was not updated, or a document is missing. Keeping the carrier, the load, the documents and the payment details in one system removes most of them. This is part of what freight broker software is for.
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