Think of invoice factoring as a cash advance on your pay. You’ve delivered goods for a broker, shipper, or similar client. They have to pay you for the safe transportation, so you invoice them and wait. Sometimes, waiting weeks or months for that pay to arrive is frustrating. Invoice factoring helps you avoid this frustration.
How Invoice Factoring Works
You have bills and wages to pay, but the time it takes them to process the invoice, mail the payment, and have it clear the bank can be lengthy. You don’t have time to waste. An invoice factoring specialist purchases your invoices, pays you as soon as that day, and helps you keep up with your bills. Here’s how it works.
- Pick up the load and get a signed bill of lading.
- Complete the trip and safely deliver the goods to the store, warehouse, or facility.
- Collect proof you’ve completed the delivery.
- Create an invoice and fax, mail, or email it to your client.
Now, you wait. Sometimes, that wait can be excruciating.
If your client pays every invoice at the end of the month, you could be waiting weeks before your payment is sent. You wait again for it to arrive in the mail or to your bank if you have the luxury of getting clients to pay you electronically. It has to clear your bank, and if it doesn’t, you risk paying bounced check fees, overdraft fees, and even late payment fees if you’re unable to pay your bills during that long wait.
With invoice factoring, you take that signed bill of lading from the moment your driver picks up the cargo or delivers it. You sell it to a freight factoring company and get paid a percentage upfront. There’s no more waiting weeks or months to receive your payment.
In exchange for what is a cash advance, you do pay a fee for the service. Invoice factoring rates and fees are something you do have to pay in exchange for same-day or fast payments – usually no more than two or three business days. Those fees are minimal compared to the interest you pay using your business credit card to pay bills or late-payment fees you face if you wait to pay bills until you have the money.
If you do decide to wait and deal with late fees, you’re forgetting something. Those late payments may appear on your business credit report. You risk having a bad credit history, which will increase your interest rates and make it harder to get loans or advantageous credit card rates.
Different Invoice Factoring Rates and Fees You’ll Encounter
When you factor invoices, there are several fees you might encounter. Every freight factoring company differs, so ask about these fees. If you do your research, you’ll find low freight factoring rates with minimal fees. You end up with more money in your bank because of this. These are the fees you encounter when factoring your invoices.
- Advance Fees – This is the fee you pay when you request that the freight factoring company pays you in advance. It varies from one company to the next, and the number of trucks in your fleet can also impact the fee. More trucks lower the percentage. In general, most companies fall in the 1% to 5% range.
- Aging Fee – With some arrangements, the advance fee is based on a specific period, such as 30 days. If your client hasn’t paid the invoice in 30 days, an aging fee can be added each day over the date the invoice was due.
- Monthly Fee – Some factoring companies charge a monthly fee to cover the administrative fees for processing invoices and tracking down late payments.
- Origination Fee – This is a fee to process your application and get you set up to factor your invoices with the company.
- Reserve – The company may require you to have some money in a reserve fund in case a client fails to pay. This is more common in recourse or mixed arrangements.
- Wire Transfer Fee – If you are paid via a wire transfer or ACH direct deposit, you get money faster, but your bank or the freight factor may charge a fee to make the payment using this method.
You also need to consider whether you have an arrangement that is non-resource, recourse, or a cross of the two. Fees are based on the risk the freight factoring company takes.
A non-recourse agreement removes any further responsibility from your company. If your client doesn’t ever pay the invoice, the factoring company cannot come to you for repayment of the advance you received. Fees are higher because this arrangement brings a higher risk to the factor.
A recourse arrangement requires you to pay back the money you received. Because the risk is on your shoulders, you get lower rates.
A mix requires you to pay back a certain percentage. It’s going to have a mid-range rate as both parties take on some of the risk.
When you talk to a freight factoring company, ask about the rates and negotiate a rate that suits your company’s needs. You might find it works to talk about what you want to pay in fees to ensure you’re getting the best arrangement for your budget.
Understanding the Cost Structure
The cost structure is defined as the “various costs (fixed and variable) that a business occurs.” In freight factoring, your costs are going to be based on these four factors.
- Your business credit history
- How large your invoices are
- How many trucks are in your fleet
- The freight factoring terms that you agree to
If you’re trying to keep costs down, make sure you pair a freight factoring agreement with options that help grow your business. Load-finding apps are a good example. Instead of having no work during the slow season, you can use a load-finding app to search for work. With free credit checks from Saint John Capital, you also can check the creditworthiness of a company before you agree to transport their cargo.
Is Invoice Factoring Always the Best Option?
If you are looking for a steady flow of cash throughout the month, invoice factoring is a brilliant choice. You do pay a fee for the service, but it’s minimal compared to the risks of not being able to pay wages, taxes, licensing fees, or other bills.
When it is not the best choice? If you have a handful of clients who pay quickly and never stray from routine, keep invoicing directly with them. But, if you want to increase your workload, use freight factoring to find additional work and use invoice factoring just on those new brokers and shippers.
Talk to Saint John Capital about freight factoring services that help you grow your business. You’ll get additional trucking industry benefits like fuel discounts, low-interest business lines of credit, access to load-finding apps, and free business credit checks.
Keep invoicing your trusted clients as you currently do, but expand your business by taking new clients you find with the load-finding app. Use the free credit checks and freight factoring services to guarantee you get paid quickly as you take extra work when you need it. Saint John Capital can help you do this.
