So many people shy away from freight factoring due to the things they hear. With so many myths, it’s hard to decide what’s true and what’s being exaggerated. We’re here to help you better understand the truth behind ten common freight factoring myths.
There’s No Way Freight Factoring Will Remain a Viable Option in the Future
One of the top myths about freight factoring is that it is an unsustainable option. The truth is it’s been a system that’s been used through several centuries and cultures. Many centuries ago, a “factor” would work with a business owner to help them acquire funds needed in exchange for something needed. Think of the British Empire and the East India Trading Company. A factor might give a ship owner money to sail to another land to get spices or teas to bring back. It helped manage seasonal changes with the growing season and left everyone happy as they had what was needed.
Freight factoring today is similar. You’re trading your unpaid invoices for immediate cash. The person supplying that cash charges a little extra in the form of a fee, which ends up being advantageous when you can’t wait and don’t want to pay a high-interest rate and don’t qualify for a commercial line of credit.
Factoring continues to be a thriving industry. Between 2001 and 2015, the industry’s volume doubled to around $2.4 trillion throughout the world. The recession had minimal impact.
Only Companies on the Verge of Bankruptcy or Just Starting Up Use Freight Factoring
Have you heard that the only companies that use freight factoring are almost bankrupt? There’s a myth that only companies in desperate need of money to avoid bankruptcy factor their invoices. The other thought is that an established trucking firm is rolling in cash. Therefore, only a start-up would ever need some money in a hurry. The reality is that invoice factoring is a smart move for any company that has bills to pay.
To run your trucking firm, you have to keep your trucks running. That means fuel, maintenance, and unexpected repairs occur regularly. You have rent, truck payments, and utilities to pay each month. You also have wages, taxes, and other expenses that you can’t avoid paying for months. Your clients may take a month or two to pay an invoice, but that won’t matter to your employees and others waiting on payments. It would be best if you had cash now, and freight factoring ensures that happens.
Customers Look Unfavorably on Trucking Firms that Factor Their Invoices
Companies who partner with a freight factoring expert are not trustworthy is likely another myth you’ve come across. If you need cash that desperately, some worry that it looks like you aren’t a reliable trucking firm. If that’s what’s keeping you from using a freight factoring company, it’s important to know that a broker or shipper won’t care. If they do make comments, it’s most likely that they have a habit of paying late or not at all and realize that you’re smart enough not to fall for their bad habits.
Choose a freight factoring expert like Saint John Capital that offers free credit checks of your brokers and shippers. You’ll appreciate knowing if a potential new customer has a habit of not paying their bills on time.
It’s a Complicated Process That Takes Time
Some people worry that invoice factoring is a time-consuming process. With a company that embraces technology, it’s as easy as taking a photo of the bill of lading, submitting it, and getting paid that same day. You don’t have to create an invoice, send anything through the mail or fax, and wait weeks for a check to arrive. Money is wired instantly to your debit card or bank account.
Freight Factoring Is Expensive
Traditionally, businesses could get a commercial line of credit to cover expenses while waiting for their clients to pay an invoice. These business lines of credit are loans that you pay interest on until the money is paid back. Interest rates vary. For Bank of America business lines of credit starting at $25,000, the interest rates start at 3.75% (as of 10/15/21). Wells Fargo offers a line of credit for new customers of $5,000 to $100,000 with an interest rate starting at 5% (as of 10/15/21).
Freight factoring rates are often far less than those charged on a business line of credit. Saint John Capital’s rates start at 1% for 11 or more trucks, 1.25% for 7 to 10 trucks, 1.5% for 3 to 6 trucks, or 1.95% for 1 or 2 trucks. Plus, this is an advance on assets you are already holding, so you don’t have to repay anything or worry about being unable to pay a loan back.
There Are Always Hidden Fees
Hidden fees are not always part of the freight factoring process. While it’s true you will be charged a factoring rate and a bank fee for the bank wires or ACH transactions, that may be the only fees you experience. Some firms charge a fee if your broker or shipper doesn’t pay by the end of the month, but not every company does.
Bank transaction fees may be avoidable if you look into a debit card with the freight factoring company. If you get paid to that debit card and use it to cover your bills, fuel-ups, and repairs, you’ll often avoid some hidden fees.
Saint John Capital uses a flat-fee program to avoid hidden fees. If your broker or shipper doesn’t pay on time, you won’t be charged a hidden fee.
If You Use Freight Factoring, You Have to Factor Every Invoice
Another common freight factoring myth is that you have to factor in every invoice you have. This isn’t true. If you have a client who pays on time, you don’t have to factor their invoices. Instead, use freight factoring to take on a new client who you are unsure will pay promptly or wait until an entire month or two have passed.
You’ll Get Stuck in a Never-Ending Contract
Some people avoid freight factoring arrangements because they’ve heard that contracts last years with no way to get out of them. That’s also not true. While some companies may ask you to use their services for a year or to meet a specific quota each month or you’ll get a less advantage rate. You shouldn’t have to be locked in unless you’re okay with it.
For that reason, many companies do not require you to sign up for a specific amount of time. You factor the invoices you want to factor and are free to come and go as you wish.
There’s No Way to Immediately Get All of the Money That’s Due When You Factor Invoices
Some freight factoring companies only allow you to have 80%, 90%, or 95% of the money that’s due. The remaining 5% to 20% is held in reserve until your broker or shipper pays the invoice. If you need all of your money, this is a problem. To avoid it, choose a freight factoring specialist that provides arrangements with no reserves.
All Freight Factoring Companies Are the Same
Freight factoring companies are not the same. That’s one of the biggest myths. Rates for freight factoring may be 1% with one company and 5% with another. That company offering a 1% rate may only agree to provide an 80% advance, while the one with a 5% rate lets you have 90%.
Choose a freight factoring company with competitive rates, and make sure it’s not just an introductory special. Ask about the advance rates and find out if there are hidden fees. Finally, be sure you understand the contract. You may only get low rates if you agree to factor a set number of invoices each month. That may end up costing you more in the long run, so you have to do your research and make sure you’re getting the best arrangement for your trucking firm.
Saint John Capital believes you should have all of your money when you partner with us. We have 100% advance rates and flat fees. Opening an account is easy and doesn’t require much from you. Fill out a quick form with your name, MC number, email, and phone number.