Freight Factoring Explained: How Selling Invoices Works

A carrier delivers a load, invoices the broker or shipper, and then waits. Freight factoring, also searched as load factoring, trucker factoring or factoring for trucking companies, is one way to turn that unpaid invoice into cash sooner. This guide explains what factoring is in legal terms, what the notice of assignment does, and how the cost works, using the Uniform Commercial Code (UCC) and a simple worked example. It names no companies and offers no financial advice, and the fees in the examples are invented.

What Factoring Is, in Legal Terms

In factoring, a business sells its unpaid invoices, which the law calls accounts, to a third party, the factor. The UCC's Article 9 on secured transactions applies not only to loans secured by property but also to a sale of accounts (UCC 9-109(a)(3)). Section 9-318(a) adds that a seller that has sold an account does not retain a legal or equitable interest in the collateral sold. Put plainly: after the sale, the invoice belongs to the factor, not the carrier.

The UCC is a model law that each State enacts, sometimes with local changes, so check the version that applies where you do business. The commercial terms of a factoring deal come from the contract between the carrier and the factor, not from the UCC. That includes the fee and whether the carrier remains liable if the customer never pays.

The Notice of Assignment

The person who owes the invoice, the broker or shipper, is called the account debtor. Section 9-406(a) says that the account debtor may discharge its obligation by paying the original seller until it receives a notification. After it receives one, it may not. The notification must be authenticated by the seller or the factor, and must state that the amount due has been assigned and that payment is to be made to the factor. After receiving that notification, the account debtor discharges its obligation only by paying the factor. Paying the original carrier after the notice does not discharge the debt.

The notice must reasonably identify the rights assigned (9-406(b)(1)), and if the account debtor asks, the factor must promptly provide reasonable proof that the assignment was made (9-406(c)). Until the factor does so, the account debtor may keep paying the carrier. For a broker or shipper receiving such a notice, the practical step is to confirm the notice identifies the specific invoices and to request proof if needed before redirecting payment.

What a $2,000 Invoice Actually Nets

These numbers are invented for the arithmetic. A carrier invoices a broker $2,000. The factoring contract provides for an advance of 90 percent of the invoice and a fee of 3 percent of the invoice, with the rest held as a reserve.

Advance paid to the carrier: 0.90 × $2,000 = $1,800.
Fee: 0.03 × $2,000 = $60.
Reserve released after the broker pays the factor: $2,000 − $1,800 − $60 = $140.
Total the carrier receives: $1,800 + $140 = $1,940, which is $60 less than the invoice.

The fee measured against the cash the carrier actually got up front is $60 ÷ $1,800 = 3.3 percent. If the broker would otherwise have paid in 30 days, the carrier is paying that amount to receive $1,800 about a month earlier. Contracts differ widely: some charge by the day, some add fees for ACH or wire payments, and some charge extra when the customer pays late. Compare offers on the total dollars paid per invoice, not on the headline percentage alone.

Questions to Ask Before Signing

What is the advance rate, and when is the reserve released?
What is the fee, how is it calculated, and what other fees apply? Ask for a worked example on a real invoice.
Who bears the loss if the customer does not pay? The contract states whether the carrier remains liable. Do not assume.
Must every invoice go to the factor? Some agreements require a minimum volume or all invoices from certain customers.
How can the agreement be ended, and what does it cost?
Which customers will the factor accept? A factor may decline invoices owed by customers it does not approve.

Tax treatment, State-specific rules and the choice of provider are outside this guide. Quick-pay programs offered directly by brokers are payment terms set by contract. Load Boards: How to Vet a Load Before You Book It covers what federal rules do and do not say about payment timing.

Frequently Asked Questions

What is freight factoring?

Selling a carrier's unpaid freight invoices to a third party, the factor, for an advance of cash now, with the factor collecting the invoice from the broker or shipper later.

Does the broker have to pay the factor instead of me?

After the broker receives an authenticated notice that the invoice has been assigned, it discharges the debt only by paying the factor. The notice must also say that payment is to be made to the factor (UCC 9-406(a)). It may ask for reasonable proof of the assignment.

Is factoring the same as a loan?

The UCC treats a sale of accounts as within Article 9 and says the seller keeps no interest in what was sold. Whether a particular arrangement is a sale or a loan can depend on its terms, which is a question for a lawyer reading the contract.

Is the fee the only cost?

Not necessarily. Check for additional charges on payment methods, late customer payments, minimums and early termination.

Is quick pay the same as factoring?

No. Quick pay generally means an accelerated payment term from the party that owes the invoice, while factoring is a sale of the invoice to a third party. Because quick pay is not a defined legal term, ask for the specific terms, including any fee, in writing.