Did you know that freight factoring can keep you from crippling debt? We recently found three statistics that every business owner should know.
- 75% of small businesses receive payments an average of eight days past the due date, and services businesses report the most frequent delays.
- 55% of invoices generated each month are paid late, and if they exceed 30 days past the due date, they’re likely to still be unpaid after three months.
- 22% of small businesses don’t have a strong cash flow and either borrow money to make ends meet or deal with late payment fees and other penalties for not being able to pay their bills.
We agree this sounds negative and raises alarm. However, there are a few facts that also stand out when it comes to managing your business wisely.
- Businesses that accept card payments as well as other options have a median late payment delay of just one day.
- Factoring improves your cash flow, which gives you working capital.
- The opportunity to invest in your business and employees increases.
Administration teams spend a lot of time trying to get timely payments from their clients, which impacts other areas of the business operations. There’s a better option. If you’re unfamiliar with freight factoring, the right arrangement helps soften any financial risk.
What Is Freight Factoring?
Before we dive into the different ways freight factoring helps you limit your company’s financial risk, it helps to understand what it is.
With freight factoring, you partner with a specialist in factoring who takes over invoicing for you. In exchange for a fee that’s usually less than 5%, you no longer must invoice clients or chase late payments. Instead, you get paid the same day you deliver items for a client.
The freight factor invoices the client using the information you submit on the bill of lading. You get paid, the factoring company generates the invoice, and that company also tracks payments. With regular, timely payments, your cash flow is strong and you have the working capital you need to stay strong in a troubled economy or during a slow period.
Here’s an example of how an arrangement works. Say that Company A delivers a load of produce for their client. The payment for that load is $10,000. Company A partners with a freight factoring company for a 3% fee and 80% now with 20% held in reserve.
Once the truck arrives at the loading dock and the produce is unloaded into the warehouse, you get a signed bill of lading. That paperwork proves that the shipment is transferred to the destination and the job is complete. Company A opens the freight factoring app and sends a picture of the bill of lading to the factor for processing.
The factor looks over the form and verifies the rate. A business credit check might be required if you don’t have a long history of doing work for this client. If all is well, payment is approved.
Once the payment is approved, the math begins. Take the $10,000 you’re owed and remove the 3% fee. That brings the total due to $9,700. You only get 80% ($7,760) now. The remaining 20% is paid when your client pays.
That gives you $7,760 to use right now to pay bills, invest in your business, and stay afloat. You avoid late fees on credit cards that you use to cover bills when you’re waiting to get paid. You don’t have to take out a loan to cover emergency expenses. You can put money in savings and have working capital available when it’s needed.
Key Benefits Offered with the Right Factoring Arrangement
Factoring puts money in your hands quicker than you’d usually have it. There are other benefits to consider.
Provide Your Clients with Convenient Payment Methods
When you work with a freight factoring company, you have an app you can use to track where your payment requests are and what’s about to be paid to your account. While that helps you, there’s an added benefit. Your clients receive their invoices with a link they can use to pay you using the online payment system.
Remember earlier when clients were more likely to pay invoices on time when a credit card was a payment option? When your clients can use online payment systems to pay you, credit cards are accepted. Payments are more likely to arrive by the due date.
This helps you, too. Freight factoring offers a couple of options. A recourse arrangement requires you to repay the money you received from the factoring company should your client fail to pay the invoice by the due date.
A non-recourse arrangement protects you from having to repay, but only in a couple of circumstances. Think of it as a form of invoice insurance. You don’t have to repay if your client fails to pay the invoice due to bankruptcy or sudden closure. You’ve been paid and won’t have to give that money back.
Improve Your Cash Flow When You Get Paid Quickly
When you’re paid the same day you deliver a load, you have a strong cash flow. This keeps you from taking on too much excess debt.
As of January 2025, the average business credit card interest rate is 22%. The average loan interest rate on a business loan ranges from almost 7% to close to 12.5%. With an average freight factoring fee in the 1% to 5% range, the percentage you pay for the service is far lower than other financial options. You save money.
Freight factoring puts money on your card or in your bank account within a few business days. You have immediate cash to use for paying wages, utilities, truck repairs, maintenance bills, and other necessary expenses. You no longer have to pay bills late and accept the hefty late payment fees and damage to your credit score.
Invest in Your Business
With a strong cash flow, you have working capital that you can invest in your business. Suppose you’re struggling to retain drivers. You learn your competition treats all drivers to lunch each Friday, and that’s something drivers want. With working capital readily available, you can do the same or better and become a more appealing company to prospective employees.
It’s not just employees. You get paid after every delivery. Instead of paying for your trucks once a month, make weekly payments and pay off your trucks faster. The money you save on interest is easily used to upgrade your equipment or improve your office space.
Stop Chasing Late Payments
The other benefit is one that trucking company owners appreciate. You no longer spend hours generating invoices and chasing late payments. Collections practices can take hours out of your schedule. When you have staff trying to get clients to pay overdue invoices for 10 hours a month, what’s being pushed aside to make time?
Saint John Capital does the invoicing for you. We generate an invoice that you can upload to your financial software. If your client doesn’t pay on time, we handle collections, too. Your office workers focus on their essential job duties.
