Whether you’re just starting out or have been in business for a few years, growth often requires financial assistance through products like bank loans or business lines of credit. Either way, they are financial products that come with pros and cons. It’s why many trucking company owners also consider the use of freight factoring for growth. Take a closer look at these options to determine the best ways to identify which is better for your needs.
How Freight Factoring Works
It’s important to know that freight factoring is not a loan. It’s not reliant on your business or personal credit score. It’s more of an advance on the money you’re due, and it works like this.
You’ve talked to a broker or shipper and agreed to drive a load to its destination. They’ve agreed to pay you for that work. Suppose a load of fresh produce is going across the country, and you’ve agreed to $3.25 per mile. The trip is expected to be about 3,110 miles, which is $10,107.50.
Once the load is delivered, you’ll invoice the client for that $10,107.50. The client then gets the invoice and pays it when it’s due, which might be a month from now if you agreed to NET-30 terms when you accepted the job.
That month can be painfully slow if you have bills to pay and limited money coming in until the invoices for all of your clients are paid. As bills line up, overdue or late feels and interest charges pile up and drain your savings when those invoices finally get paid.
Instead, you take that bill of lading and send it to a freight factoring company. They run a business credit check to determine the creditworthiness of your client. Once that’s done, your request is either denied or approved. If you’ve done your homework and run a credit report before accepting the job, denial is unlikely.
The accepted payment request is now made. Depending on the terms, you might get all 100% right now or a portion of it. The freight factoring fee is deducted from the total amount. If you agreed to a 5% rate, the freight factoring would keep $505.38 as a fee. The remaining $9,602.12 is sent to you. If it’s 100%, you get that entire amount. If you agree to 90% now and 10% later, you’d get $8,641.91 now and the balance when your client pays the invoice.
You do lose that 5% or whatever the fee is, but it’s a lot lower than credit card interest rates. It’s better to pay 5% than the national average interest rate of 22.2% for a business credit card. You save money, and that money you save helps make it easier to grow your trucking company.
There is a risk to freight factoring that must be considered. If your client never pays the invoice, you may have to repay the advance you received. Paying that money back is challenging if you have spent what you received. This is why it’s worth the higher freight factoring fee that provides a non-recourse arrangement. If your client goes bankrupt or closes down unexpectedly, you’re protected from repayment.
Otherwise, the money you receive goes to a business debit card that provides fuel discounts and can be used around the country at ATMs. Transfer money to your savings account when you want and enjoy having access to money for emergency truck repairs, fuel fill-ups, insurance payments, and other bills.
How Traditional Bank Loans Differ
That’s freight factoring, but there are also business loans that can help grow your business. A business loan may or may not require collateral to secure it. You borrow an amount of money needed for business growth. You might be buying extra trucks for your fleet or a new space to avoid renting a garage and warehouse for the rest of your career.
Once the loan is approved, you have the funds needed, but you also have monthly payments that cover the amount you borrowed (principal) and interest on the loan amount. Paying your loan on time is necessary to avoid late fees and marks against your credit score. If you go months and are unable to pay, you might end up having the loan go into default. Whatever you offered as collateral is taken from you and used to repay what you owe. It might be trucks or your business’s buildings.
Business loans as of early 2024 were in the 6% to 12.5% range. Fees for freight factoring are much lower. Rates do vary from one bank to the next and are determined by the type of loan. Here are a couple of examples.
There are unsecured business loans where collateral isn’t required. The loan rates for this type of business loan are higher. Bank of America’s rates for an unsecured business loan is 8.5%, and you must have a personal FICO score over 700. You must have at least $100,000 in annual revenues and been in business for over 2 years. Unsecured loans start at $10,000 and have terms of 1 to 5 years.
At Bank of America, a secured business loan requires you to secure the loan with CDs or business assets. If you use business assets, loan terms are up to 4 years. It’s 5 years if you secure the loan with CDs. Loans start at $25,000 and have rates starting at 7.5%. You must have at least $250,000 in yearly revenues and been in business for over 2 years.
Consider a business line of credit instead. Apply for this loan product and get a credit line you spend against, similar to how a credit card works. You have a set amount of time when you can borrow against the loan and make payments that cover the interest. After the draw period ends, you have to pay both interest and principal, so your monthly payments drastically increase. The benefit, however, is that you only use what you need.
Which Is Better?
Both are handy financial products for growth, but freight factoring offers one benefit. It doesn’t impact or rely on your credit score. If you have poor credit, a traditional bank loan may be tough to qualify for. Freight factoring looks at your clients’ credit ratings, but your own doesn’t matter.
With free unlimited credit checks, you’ll be able to look at different businesses before you agree to haul loads for them. Once you have, even if you’ve never dealt with them before, you have the freight factoring company ready to pay you as soon as the payment request is processed. Your client then pays the factoring company when the invoice is due. It’s a hassle-free way to have money coming in.
Get a free quote from Saint John Capital. Freight factoring is a great place to start. With the incredibly low fees and immediate payments, it becomes a lot easier to keep bills paid on time and avoid late fees or dings on your credit rating. Call us or fill out the online form to learn more.
