The Truth About Factoring
This is a sensitive and often controversial topic, but it’s one that needs to be addressed. Let me be clear: I’ve never been a fan of factoring companies since I entered the trucking industry 20 years ago. In fact, I’ve had strong negative feelings about them. Why? Because I felt they often preyed on small business owners who needed help with cash flow. Many, in my opinion, took advantage of these companies. In my early days, I saw factoring rates as high as 10% of the invoice, not including hidden fees. It was frustrating and felt unfair.
Before diving into the details, let’s clarify what freight factoring is and whether it’s right for your business. One principle I stand by is this: if you don’t need it, don’t use it. That might not be the typical advice from someone with ownership in a factoring company, but it’s the truth. We did a podcast video earlier this year that explains a lot of this, which you can watch here.
Freight factoring involves the purchase of a receivable—a load that has been transported. Typically, the trucking company sends proof of delivery, and funds are deposited into their account the next day or even the same day. The cost is usually a percentage of the load. For example, if you haul a load totaling $1,000 and get it factored at 3%, you would receive $970, with $30 going to the factoring company as their fee.
But here’s where the industry can get tricky. Some factoring companies impose hidden fees that the average business owner might not notice. For instance, they might charge a 'transaction' fee every time you factor. These fees, usually between $5 and $10, seem small at first but can add up significantly over a year.
Another issue is when carriers are locked into contracts requiring them to factor all their loads for an entire year. If they choose to exit the contract early, they might face buyout fees exceeding $5,000. And if their truck breaks down, they could still be on the hook for minimum payments to the factoring company. It’s a harsh reality that can be heartbreaking.
Now, I’m not saying all factoring companies operate this way, but it’s crucial to do your homework. In 2014, we started Smart Freight Funding to combat what I see as predatory practices targeting small trucking companies. We have no contracts, no minimums, and the factoring percentage is straightforward. We’ve even had employees from other factoring companies ask, “Do you really have no contracts and no minimums?” The answer is yes, because it’s the right thing for the customer.
This post isn’t meant to be a plug for Smart Freight Funding but rather a reminder to carefully research before choosing a factoring company. And again, if you don’t need to factor, don’t. At Smart Freight, we allow you to factor only the accounts you choose and to work directly with those that pay promptly. While some may argue that factoring is only for small companies, we’ve worked with large fleets, including one with 300 trucks, where factoring makes sense from a balance sheet perspective.
We invite you to learn more about our factoring services at Smart Freight Funding.