In this guide
- Why Carriers Use Factoring
- How Freight Factoring Works, Step by Step
- Recourse vs Non-Recourse Factoring
- Advance Rates and Fees Explained
- Contract Terms to Check Before Signing
- Notice of Assignment and Letter of Release
- Factoring vs Broker Quick Pay
- The Dispatcher's Role in Factoring
- Pros and Cons of Freight Factoring
- Frequently Asked Questions
Freight factoring is a way for trucking companies to get paid quickly. Instead of waiting 30 days or longer for a broker to pay an invoice, the carrier sells the invoice to a factoring company, which pays most of the amount within a day or two and then collects from the broker. The carrier pays a fee, usually a small percentage of the invoice. For owner-operators and small fleets who need cash for fuel, repairs and payroll, factoring can be the difference between growing and running out of money.
Key takeaways
- Factoring converts unpaid freight invoices into cash within days, for a fee.
- Fees are commonly a few percent of the invoice, and contract terms vary widely.
- Recourse factoring leaves the carrier responsible if the broker does not pay; non-recourse shifts certain credit risks to the factor.
- Dispatchers play a big role: checking broker credit before booking and submitting clean paperwork quickly.
Why Carriers Use Factoring
Brokers commonly pay carriers on terms of around 30 days after receiving the invoice and paperwork, and some take longer. Meanwhile, the carrier has already paid for fuel, tolls, driver wages, insurance and truck payments. For a small carrier running several loads a week, tens of thousands of dollars can be tied up in unpaid invoices. Factoring closes that cash-flow gap so the trucks keep running.
How Freight Factoring Works, Step by Step
- The carrier signs up with a factoring company and agrees to a contract.
- A notice of assignment (NOA) is sent to brokers, instructing them to pay the factoring company instead of the carrier.
- The truck delivers the load.
- The carrier or dispatcher submits the invoice with the rate confirmation and signed proof of delivery, usually through the factor's app or portal.
- The factor verifies the load and pays the carrier, often within 24 to 48 hours, sometimes faster.
- The broker pays the factoring company on its normal terms.
- Any reserve is released (for advance-and-reserve arrangements), minus the factoring fee.
Recourse vs Non-Recourse Factoring
| Recourse factoring | Non-recourse factoring | |
|---|---|---|
| If the broker does not pay | The carrier must repay the advance or replace the invoice | The factor absorbs the loss in the situations covered by the contract |
| Typical fees | Usually lower | Usually higher, reflecting the added risk |
| What is covered | Not applicable | Often limited to the broker's inability to pay (such as insolvency), not disputes over paperwork, damage or service |
| Best for | Carriers who work with well-established brokers and want lower fees | Carriers who want protection against broker credit risk |
Read non-recourse terms carefully. "Non-recourse" rarely means the carrier is protected in every situation.
Advance Rates and Fees Explained
Factoring companies structure their pricing in different ways:
- Flat-rate factoring: the carrier receives the full invoice amount minus one fee, paid upfront.
- Advance and reserve: the carrier receives an advance, commonly a high percentage of the invoice, and the remaining reserve is released after the broker pays, minus the fee.
Worked example
A carrier factors a $2,600 load with a 3% fee.
- Flat rate: fee = $78, so the carrier receives $2,522 within a day or two.
- Advance and reserve at 95%: the carrier receives $2,470 upfront. When the broker pays, the $130 reserve is released minus the $78 fee, so the carrier receives another $52.
Either way, the carrier receives $2,522 in total. The difference is timing. Remember to include the factoring fee when you calculate a load's profit.
Contract Terms to Check Before Signing
- Fee structure, including whether fees increase the longer a broker takes to pay.
- Additional charges such as setup, same-day transfer, invoice processing or credit check fees.
- Contract length and termination fees, and the notice required to leave.
- Minimum volume requirements.
- Whether you must factor all invoices or can choose which loads to factor.
- Recourse period: how long the factor waits before charging back an unpaid invoice.
- Extra services such as free broker credit checks, fuel cards or fuel advances.
Notice of Assignment and Letter of Release
A notice of assignment (NOA) tells a broker that the carrier's invoices have been assigned to the factoring company, so payments must go to the factor. Brokers who receive an NOA and still pay the carrier directly may be asked to pay again. When a carrier leaves a factoring company, the factor issues a letter of release (LOR) so brokers know to pay the carrier, or a new factor, going forward. Dispatchers should keep the current NOA in each carrier's document folder and include it in new carrier packets.
Factoring vs Broker Quick Pay
Many brokers offer quick pay: faster payment in exchange for a fee deducted from the invoice. Quick pay can be useful for occasional loads, but terms, speeds and fees differ between brokers. Factoring gives a consistent process across all brokers, plus credit checks, but usually involves a contract. Some carriers use factoring for most loads and quick pay selectively.
The Dispatcher's Role in Factoring
- Check broker credit before booking. Many factoring companies let carriers check whether they will buy invoices from a particular broker. Booking with a broker the factor rejects can leave the carrier waiting a long time for payment.
- Collect complete paperwork fast. A signed rate confirmation and a clear, complete POD are essential.
- Submit invoices the same day the load delivers.
- Track payments and follow up on anything held for missing documents.
- Record accessorials properly so detention and lumper reimbursements are invoiced with the load.
See dispatch paperwork explained for what each document should contain.
Pros and Cons of Freight Factoring
| Advantages | Disadvantages |
|---|---|
| Fast, predictable cash flow | Fees reduce profit on every factored load |
| Broker credit checks help avoid bad payers | Contracts may include minimums, long terms or exit fees |
| Less time spent chasing payments | Recourse factoring still leaves credit risk with the carrier |
| Makes it easier to accept loads from brokers with longer payment terms | Some brokers or loads may not be approved by the factor |
Learn the business side of dispatchingOur training covers documentation, invoicing and dispatch business setup.
Explore the CourseFrequently Asked Questions
How much does freight factoring cost?
Fees are commonly quoted as a percentage of each invoice, often in the low single digits, but they vary by factoring company, recourse type, volume and how quickly brokers pay. Compare the total cost, including extra charges, not just the headline rate.
Do all carriers need factoring?
No. Carriers with enough cash reserves to cover expenses while waiting for payments may not need it. Factoring is most useful for new and small carriers with tight cash flow.
Can a dispatcher get paid through the factoring company?
Dispatch fees are normally invoiced by the dispatcher to the carrier. Some factoring companies offer ways for carriers to pay service providers, but the freight payment itself should go from the broker to the factor or carrier, not through the dispatcher.
What documents do factoring companies need?
Typically the invoice, the signed rate confirmation and a signed bill of lading or proof of delivery, plus receipts for any reimbursable accessorials such as lumper fees.
