As a business owner, you’re weighing your options. You struggle to get bills paid on time, and it’s getting worse as brokers and shippers take too long to pay. Your best clients want to pay all invoices at once, on the first day of the month. You’re waiting four weeks or longer to get paid for the work you do at the beginning of the month.
It’s for that reason that you’re looking at freight factoring solutions. You worry about the fees, however. Can you truly afford freight factoring or is there a better option? Take a closer look at alternatives and compare the pros and cons of freight factoring, loans, credit cards, or paying late fees.
A Quick Breakdown of How Freight Factoring Works
Freight factoring is a beneficial resource for many trucking companies, but you do need to understand how it works. If you walk into a freight factoring arrangement without understanding the rules and doing your research, you could end up greatly disappointed. You have to research different companies, rules, and rates to find the right fit.
For a trucking company that usually waits 30 or even 60 days to get paid, freight factoring is immensely beneficial. Instead of waiting to be paid, the factoring company purchases your invoices at a discounted rate. They pay you immediately and wait for repayment from your broker or shipper. You have the money they need, but you do have to agree to that fee, which reduces how much you get.
Many freight factoring companies charge a fee of 1% to 5%. This means you get 95% to 97% of the invoice amount in exchange for getting paid the same day or within a couple of days, depending on your bank’s processing times and the arrangement you make with the factor. Even a three-day wait is better than waiting a month or two.
Once you have the cash in hand, you can pay bills on time, pay your employees, and keep insurance, licenses, and certifications current. Sounds good, right? For most companies, it is a fantastic arrangement that helps grow the company and maintain a high credit rating.
However, you have to ensure the freight factoring arrangement makes sense. There are different fees to consider. While one factoring company may not charge one fee, another might.
Understanding the Different Types of Freight Factoring Fees
While deciding if the economics behind factoring is right for you, you have to consider the fees. There are several different fees that you might encounter when looking into freight factoring.
Factoring Rate or Fee
The factoring rate, also known as a factoring fee, is the most common, and it ranges from 1% to 5%, typically. The more trucks in your fleet, the lower the fee. Your broker’s or client’s credit rating can also impact how high or low your rate is. Look for a freight factoring company that offers free business credit checks. If you verify their creditworthiness first, you can save money on fees.
Account Maintenance Fee
This fee is charged each month. It’s a maintenance fee that covers the work they have to do for invoicing, payments, etc. Sometimes, this fee is only charged if you don’t meet a monthly volume level.
ACH Transfer Fee
If you have your money sent to your bank account, what is the charge for that electronic payment? It might not seem high, but even a few dollars will add up quickly if you’re requesting 10 transfers per week.
Application Fee
If you apply for freight factoring, are you going to be charged an application fee? How about setup fees?
Expedited Funding Fee
Asking for same-day payments is often free with established companies, but smaller or newer companies may charge a fee for same-day payments.
Fuel Advance Fee
If you need a fuel advance, does the freight factoring company charge you for it? For those that do, you can often pay up to 3% extra.
Transaction Fee
See if the freight factoring company charges a transaction fee. Some do charge a fee for each invoice you send them for factoring.
Is It Economical?
Once you know the fees, you can calculate how much you’ll pay for freight factoring. Calculate this and figure out what it would cost if you paid bills late, used a credit card and accrued interest each month, or received fines for paying your employees late.
Do the Math
To get the freight factoring costs, you need to have the total amount of invoices, the factoring rate, and any additional fees. You want to multiply the invoice by the freight factoring fee and then add any additional fees. Those are your total costs.
Suppose you have $20,000 in invoices and a 5% factoring fee, $30 transaction fee, and $3 for each ACH transfer and you expect to make one per week for the month. That’s $1,042 in costs, but you have the convenience of being paid early.
Consider Penalties
There are other concerns. Your state fines you $100 per employee for each paycheck that’s paid late. You can’t pay them for the month and always pay on the 1st and 15th. They’re missing two paychecks. You have five employees, so that’s $1,000 in fines. And, they’re upset and threatening to quit, which could destroy your company.
If you weigh all of that, freight factoring is often a much smarter economic decision. If you rely on a business line of credit or credit cards, you’re adding monthly payments that you could end up struggling to pay, which hurts your credit rating and adds late fees and additional interest. The average interest rate in January 2024 was around 22%, which is much higher than a freight factoring fee.
Think About the Impact on Your Creditworthiness
A trucking company with a high credit rating might find a business line of credit has lower interest rates than a freight factoring arrangement. Research that option, too, but make sure you understand the terms. A line of credit offers the chance to take out advances for a specific period. After that, you start making payments and may not be able to take out any more advances unless you apply to refinance it and hope for the same low-interest rate.
Freight factoring can be an affordable, safer option. Why safer? Those late payments you’re making impact your credit score. You’re perusing load boards and spot a job that would help you grow your business. You inquire and are told your low credit rating is too much of a risk. Your late payments stopped you from being able to gain new clients, and that hurts a growing trucking company.
Freight factoring isn’t a one-size-fits-all arrangement, but for a company that is looking to grow, a consistent cash flow can be crucial. Even for a large trucking company, freight factoring helps with administrative duties and bookkeeping, which is just as beneficial.
