Freight factoring is when a carrier sells its unpaid load invoices to a factoring company to get paid sooner. The factoring company pays the carrier most of the invoice within days, collects the full amount from the broker or shipper later, and keeps a fee for the service.
Brokers often take weeks to pay, while fuel, insurance and driver pay are due now. Factoring is one way carriers close that gap. As a dispatcher, you will work with factoring companies often, so it helps to know how they work and what the carrier is agreeing to.
Key takeaways
- Factoring turns an unpaid invoice into cash now, in exchange for a fee.
- The factoring company pays an advance, collects from the broker, then settles the rest according to the contract.
- With recourse factoring, the carrier carries the risk if a broker does not pay. With non-recourse, the factor takes on some of that risk.
- Read the contract closely: fees, minimums, which invoices must be factored and how to leave.
- Every number in this article is a round example only, not a typical fee or advance.
How does freight factoring work step by step?
Factoring follows the same basic steps on almost every load.
- The truck delivers the load. The driver gets the bill of lading signed by the receiver as proof of delivery.
- The carrier submits the paperwork. The invoice, the rate confirmation and the signed bill of lading go to the factoring company, often through an app or email.
- The factor checks the load. It confirms the paperwork is complete and may verify the load with the broker.
- The carrier receives an advance. The factor pays part of the invoice value, often within a few days.
- The broker pays the factor. The broker has been told, through a notice of assignment, to send payment to the factor instead of the carrier.
- The factor settles the balance. Once the broker pays, the factor releases any amount held back, minus its fee, as set out in the contract.
Some factoring arrangements pay the full invoice minus the fee in one payment instead of an advance and a later balance. The contract says which model applies.
What is the difference between recourse and non-recourse factoring?
The difference is who takes the loss if a broker never pays. This is one of the most important terms in any factoring contract.
| Point | Recourse factoring | Non-recourse factoring |
|---|---|---|
| If the broker does not pay | The carrier must pay the advance back or replace the invoice | The factor absorbs the loss, but only in the situations the contract lists |
| Who carries the credit risk | Mostly the carrier | Shared, with more on the factor |
| Cost | Usually the lower-cost option | Often costs more, because the factor takes on more risk |
| What to read closely | How long before an unpaid invoice is charged back | Exactly which non-payment reasons are covered. Disputes over the load itself are often excluded |
“Non-recourse” does not always mean the carrier is protected in every case. Many contracts only cover a broker that goes out of business or cannot pay, not a broker that refuses to pay because of a claim, a late delivery or missing paperwork.
What do advance and fee mean in factoring?
The advance is the part of the invoice the factor pays up front. The fee is what the factor charges for paying early and collecting the money. Both are set in the contract and vary from company to company.
The numbers below are an example only, not a typical advance or fee.
A carrier delivers a load and invoices $2,000. Under its example contract, the factor advances $1,800 the next day and holds back $200. Three weeks later, the broker pays the factor $2,000. The factor keeps an example fee of $100 and releases the remaining $100 to the carrier. In total, the carrier received $1,900 for a $2,000 invoice, most of it weeks sooner than the broker would have paid.
Fees can also depend on how quickly the broker pays, how many invoices the carrier factors, and the broker’s credit. Some contracts add other charges, such as payment transfer fees or monthly minimums. Ask for every possible charge in writing.
What should a carrier check before signing a factoring contract?
Factoring contracts differ a lot. These questions help a carrier compare offers:
- Is it recourse or non-recourse, and what exactly does non-recourse cover?
- How is the fee worked out, and are there any other charges?
- Does the carrier have to factor every invoice, or can it choose loads?
- Is there a minimum monthly volume or a long contract term?
- How does the carrier end the contract, and how much notice is needed?
- Will the factor file a lien on the carrier’s receivables, and how is it released?
- Does the factor check broker credit before the carrier books a load?
This is general information, not legal, tax or financial advice. A carrier should have an attorney or accountant review a factoring contract before signing.
What does a dispatcher do when a carrier uses factoring?
The dispatcher keeps the paperwork clean and the money moving. In practice, that means:
- Checking broker credit before booking. Many factors will tell you whether they will buy invoices from a given broker. If not, the carrier may have to wait for payment or carry the risk itself.
- Making sure the broker knows where to pay. Send the notice of assignment with the carrier packet so payment goes to the factor.
- Sending complete documents fast. A missing signature or a rate confirmation that does not match the invoice slows payment for everyone.
- Tracking extra charges. Detention and lumper reimbursements need their own proof before the factor can collect them.
Our free Broker Check tool walks through six checks on a broker before you book, which pairs well with a factor’s credit check. For the documents behind every invoice, see our guide to reading a rate confirmation. And if you are setting up your own dispatch service, how to start a dispatching business from home covers the wider picture.
Frequently Asked Questions
Is freight factoring a loan?
Factoring is usually set up as a sale of invoices rather than a loan. The contract decides the exact terms, so read it carefully.
Does a dispatcher need a factoring company?
No. Factoring is for the carrier, which is the business that invoices for the freight. The dispatcher helps send paperwork to the factor if the carrier uses one.
What is a notice of assignment?
It is a letter that tells a broker to send payment for the carrier’s invoices to the factoring company. If the broker pays the carrier directly by mistake, it can cause disputes.
Is quick pay the same as factoring?
No. Quick pay is an option some brokers offer to pay the carrier sooner for a fee. It applies only to that broker’s loads, while a factor handles invoices from many brokers.
Learn how the money side of dispatching works
The Dispatcher 101 Dispatching Guide explains the parties involved in every load, the paperwork that gets carriers paid and how dispatchers support them. Students on both plans can ask Joe Piazza about factoring questions from their own carriers through 1-on-1 mentorship, and the Gold plan adds the agreements and templates, 12 months of load board access and a 14-day money-back guarantee.
