A carrier, a.k.a. a trucking company, uses a freight factoring company to speed up the way they get paid for the loads they run. Let's say you're picking up a load in Atlanta, GA and running that load to Birmingham, AL, and a broker gives you the load for $1,000. When the carrier delivers that load to the receiver in Birmingham, that broker does not pay the carrier the day the load delivers — instead, the broker pays the carrier 30 days after the delivery. This is called Net 30-Day Payment Terms, meaning the broker will pay the carrier 30 days after the load is delivered and the job is done. This way, the broker can use that 30 days to get paid by their customer, say Coca-Cola, after the delivery. Then once the broker is paid, they pay out to the carrier on the 30th day.
That explains the process from the broker's side, but let's look at this 30-day delay from the carrier's perspective. This delay means the carrier will have to wait a whole month after delivery to get paid for hauling the load. That's too long to wait, so a carrier may sign up with a freight factoring company to speed up their payment. Looking back at the same example: once the carrier delivers the load, they immediately collect all their paperwork — the Rate Confirmation, the Bill of Lading (BOL), and the Proof of Delivery (POD). The carrier takes pictures of each piece of paper and emails them to their factoring company, and that company pays the carrier for the load in as little as 5 minutes. This way the carrier doesn't have to wait 30 days to get paid — the factoring company does the waiting instead.
The freight factoring company isn't doing this for free — they charge a fee for the service. Let's say you sign up at a factoring rate of 3%. The load was $1,000 from the broker, and the factor buys the carrier's completed paperwork for 3%. The carrier gets a deposit of $970 the day the load is delivered. The factor makes $30 for this service — their job is waiting the 30 days to collect from the broker so the carrier doesn't have to, and can get immediate cash to pay drivers, buy fuel, pay insurance, buy groceries, etc. That $30 cost for not waiting 30 days averages out to about $1 a day. That's pretty cheap.
That's how freight factoring works. It's also worth understanding there are Full-Service and Non-Full-Service freight factoring companies. A Full-Service factor will wait the 30 days, but also take care of any billing, invoicing, and collections needed. If you sign up with a Non-Full-Service factor, you'll have to personally make follow-up calls on every load — your own collections on detention, lumper fees, TONU's, driver assist, layovers, and more, tracking down brokers who owe you extra money, and gathering the paperwork yourself. For that added full-service experience, a factor will typically charge more than 3% — maybe closer to 4%.
Again, these are good things to know when you're looking to sign up with a freight factoring company.