What Is Invoice Factoring? Freight Factoring Explained.
April 5, 2019
April 5, 2019
What Is Invoice Factoring?
No matter how much you love your job on the road or in the office, at the end of the day you just want to get paid. The problem is, sometimes it can take several days before an invoice is processed and paid.
Invoice factoring (sometimes also more specifically referred to as freight factoring) is the process by which an invoice is taken off the hands of the person or company to whom money is owed, and they are immediately paid a certain percentage of the overall sum; for example, 80% is paid up-front, and the remaining 20% is paid once the invoice itself is paid, minus any fees the invoice factoring companies add on for the service.
You might think that invoice factoring is only useful to a smaller trucking company or an owner-operator who may not otherwise have an extensive cash flow to keep them going, but with larger companies, the same can hold true. Keeping the accounting department happy without taking on any additional debt is a valuable asset to any company, especially if they want to push on with growth rather than playing a waiting game for payments to be made. Some payments can take 30-90 days to be made – valuable time in which the company would be better served by doing rather than waiting.
Invoice factoring vs taking a loan
There is a large fundamental difference between invoice factoring and taking out a loan. Invoice factoring is essentially just the conversion of your invoice into direct cash (minus the fee), meaning you take a small loss but no debt. A bank loan means you need to pay a principal as well as interest payments over time, which have the potential to add up to a much larger sum overall. Additionally, factoring can be open to anybody, whereas taking out a loan is based on your credit history and other factors.
What Is Detention Factoring?
Detention factoring functions in a similar way to invoice factoring, just with a different reason for the payment being made.
Detention payouts are made to truck drivers when they are held up by a third party and for reasons outside of their own control. Being late to pick up a shipment can have a ripple effect on a truck driver’s further route, leading to other delays and issues. Additionally, with the ELD mandate in place, drivers now can’t drive more hours than they are legally permitted to, meaning they have no recourse if they want to make up the hours they missed out on; detention payouts are intended to give financial cover under these circumstances.
The issue with detention payouts is that often carriers don’t even follow up on them due to the time and effort it can take to make sure a detention payment is actually completed, something that shouldn’t be the case. In fact, it is estimated that the events which lead to detention pay cut driver pay on average between $1.1 billion and $1.3 billion annually – or up to $1,500 per driver. According to DAT, “only 3% of drivers said that they were able to collect detention fees on at least 90 percent of their claims”. Having a process to ensure drivers are actually paid what they are due seems sorely needed in the industry.
At the time of writing, detention times have begun to gradually increase again as shippers begin to get a sense of upper hand in the freight market. This is due to shipping capacity having “loosened up” somewhat, meaning shippers have more choice in their carriers and have to make less of a concerted effort in regards to their drivers. The opposite is true when shipping capacity tightens, and shippers scramble to be seen as “shippers of choice”. One of the primary motivations behind carriers seeking such a shipper of choice is their desire to cut down on detention times, as shippers recognize the damage that high detention times can do to their relations with carriers.
Our vision of a fix lies in detention factoring and comes with multiple benefits to drivers. First of all, drivers are actually paid their detention payout, as opposed to giving up on it due to the stresses and time it can take to process. Secondly, the payment is made to them on day one. Lastly, we do all the work. Drivers simply need to hand the detention claim over to us and a process similar to an invoice factor will take place – we’ll buy the claim off the driver for a certain amount of cents on the dollar, and the remaining amount will be kept by us as a fee.
With FreightTrust we’re aiming to make both of the above factoring methods easier and more accessible to truck drivers and others in the trucking industry. We will be providing invoice factoring services as well as a detention payouts claim service, giving you financial flexibility and allowing you to move forward, rather than waiting a day more than you need to.
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