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What is Factoring?

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Understanding Factoring

Although factoring is a very common solution for most trucking companies in the transportation industry, it can be a process that is misunderstood or never considered. Listed below are some definitions and reasons that will help you better understand why many motor carriers chose to utilize factoring in their operations.

What is Factoring?

Factoring is the purchasing of invoices (accounts receivable) at a discount. A company that desires immediate payment for a good or service can sell its accounts receivable at a discount to a factor. This process is known as factoring or accounts receivable financing.

What is Transportation Factoring?

Transportation factoring is the purchasing of freight invoices at a discount. Motor carriers are the companies that sell its freight invoices to a factor in a transportation factoring relationship.

Why Factor?

The reason why most motor carriers utilize factoring is to ensure a positive cash flow for its business. This process allows carriers to circumvent the typical wait time of 30, 60, or 90-days for payment from its customers. Maintaining a positive cash flow is crucial to any business, especially in transportation. By quickly converting its invoices to cash, carriers can better meet its debt obligations, including payroll, fuel, equipment, taxes, and other operating expenses. In addition, factoring frees carriers from expending energies and added costs on collecting invoices and managing its customers' credit.

How Does Factoring Work?

Factoring is a simple and straight-forward process. Carriers generate invoices as they normally would, however invoices are remitted to the Factor and not the carriers' customers. The Factor would pay the carrier within a specified time frame (anywhere from 24-hours to five days) for their invoices. The Factor would then mail the carriers' invoices to their customers, and the Factor would manage the collections process.

How Much Does Factoring Cost?

Factoring costs you a percentage of the invoice, and can range anywhere from .5% to 10%. For many, the benefits of factoring far outweigh its cost. Without having to deal with the headache of collecting invoices and having to wait 30-60-90 days for payment, factoring provides you with prompt invoice payment and positive cash flow. Also quality factoring companies often offer special benefits, like customer credit checks, online account management, fuel card discounts, overnight courier discounts, and and professional collections, all of which help save the company money.

Factoring Glossary

Like any process, factoring has its own unique lingo. Here's some important terms to help you better understand the factoring process:

  • Advance Rate - Amount of money provided immediately to the company factoring its accounts receivable, typically expressed as a percentage of the total invoice amount. Industry Advance Rates can range anywhere from 65-95%.
  • Discount Fee/Factor Fee/Service Charge - Discount fees, factor fees or service charges are the percentage of the total invoice amount that is being charged to the company factoring its accounts receivable. Industry Discount Fee Plans vary with each Factor. The two most common type of Discount Fee Plans are Variable (Discount Fee is based on the length of time it takes the Factor to receive customer payment) and Fixed (Discount Fee is based on a fixed or set rate).
  • Factor - The Factor is the company that purchases the accounts receivable from the Client.
  • Client - The Client is the company that sells its accounts receivable to the Factor, thereby receiving immediate working capital.
  • Debtor - The Debtor is the Client's customer, the company that is being billed on the invoices and the party that will ultimately pay the invoice to the Factor.
  • Reserve or Escrow - The Reserve or Escrow is the amount of money that is not immediately provided to the Client factoring its accounts receivable, typically expressed as a percentage of the total invoice amount. Most factors maintain a Reserve or Escrow account on its Clients in the event the Client's invoices are not paid or short paid. The Factor will reimburse the Reserve or Escrow back to the Client when the invoice is paid or when the factoring relationship is ended.

One Stop Shop

In addition to providing you with the best factoring service in the United States, Match Factors, Inc. can handle all of your transportation needs through our organization's ONE STOP SHOP of transportation services! You will never need to go anywhere else.

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