Freight factoring is an important financial tool used by trucking companies, and understanding the key terms associated with it is essential. For those unfamiliar with freight factoring, it is a form of asset-based financing that involves the sale of accounts receivable (invoices) to a third-party factor. The factor then pays a portion of the invoice amount to the trucking company up-front. The factor then collects the balance of the invoice amount from the customer. The trucking company is then left with the cash needed to pay their obligations and continue operating.

The trucking industry relies heavily on freight factoring as a means of obtaining needed cash flow. It is often used by smaller companies who have limited access to traditional forms of financing. There are some key terms to familiarize oneself with when considering freight factoring:

• Accounts Receivable (AR): AR is the money owed to a company for services or products that have been provided. An AR factor will buy a company's AR invoices, providing upfront liquidity in exchange for a fee.
• Invoice Advance: An invoice advance is the amount of money a factor will advance to a trucking company, usually ranging from 80-95% of the invoice value.
• Factor Fee: The factor fee is the cost associated with the invoice advance. Fees are typically structured as a percentage of the invoice value.
• Credit Risk: Credit risk is the risk that the customer will not be able to or will not pay the invoice. Factors assess credit risk before advancing funds and will charge a higher fee for customers with a higher credit risk.
• Recourse Factoring: Recourse factoring is when the factor has the right to charge back the trucking company for unpaid invoices. Factors typically reserve the right to recourse if an invoice is not paid.
• Non-Recourse Factoring: Non-recourse factoring is when the factor assumes the credit risk of the customer, meaning the trucking company is not liable for any unpaid invoices. Non-recourse factoring is usually more expensive than recourse factoring.
• Lockbox: A lockbox is a secure account that the customer pays into that is managed by the factor. The factor can then use the funds to pay the trucking company quickly, eliminating the need for manual payments.
• Freight Bill Factoring: Freight bill factoring is a specialized form of factoring that is specifically designed for the trucking industry. Factors are familiar with the trucking industry and have access to payment and credit information that may not be available to other factors.

These are some of the key terms to be aware of when considering freight factoring. Before entering into a freight factoring agreement, it is important to understand the terms and conditions of the agreement and the associated costs. With the right partner, freight factoring can provide the trucking industry with the necessary cash flow to keep their businesses running.