Work volume isn’t always consistent when you’re an owner-operator. You’re already at a disadvantage because you have only one truck, compared with a larger company that has dozens of trucks. Some seasons are busier than others, especially when there’s a lot of holiday freight in some months and very little in a few months later.
When load volumes are irregular, it’s frustrating. Your business relies on a steady flow of cash, but the work isn’t there. If you use freight factoring, you get paid as quickly as possible, but some freight factoring arrangements don’t protect owner-operators who aren’t meeting contracted load volumes.
Freight Factoring Isn’t a Loan
There’s a misconception that freight factoring impacts your business credit score. It’s not the case. Freight factoring is not a loan; it’s a low-cost cash advance.
Typically, a credit card cash advance has an extremely high variable (fluctuating) APR that averages 24.5% per WalletHub. Freight factoring provides an immediate advance on your unpaid invoices for a factoring fee that’s a fraction of the cost.
With freight factoring, you let the factor handle invoicing and collections. In return, you pay a small fee and receive the benefit of immediate payments. In some agreements, same-day payments are possible.
Freight factoring works like this.
- Pick up or deliver a load for your client
- Collect the bill of lading
- Submit the payment request to your freight factoring company and attach the bill of lading
- Wait for approval
- Collect the money due, minus the freight factoring fee
Compare that to a line of credit or a credit card cash advance. With both, you’re paying interest on the amount you borrow, which can get expensive. If you have a 25% APR, you’re losing a substantial amount of your revenue to accruing interest.
A credit card cash advance and a line of credit appear on your credit report. They often count against you and lower your credit score. This affects your creditworthiness and makes it harder to qualify for low interest rates or loans in the future. Freight factoring doesn’t involve your credit report at all.
Understanding the Fees Involved in Factoring
The most significant fee in a factoring arrangement is the freight factoring fee. It’s a percentage, usually less than 5%, that’s removed from the amount the factor pays you.
Suppose you earned $5,000 delivering freight from a manufacturer to a warehouse. You send it to a factoring company for immediate payment, and you know the factoring fee is 3%.
The factor reduces the $5,000 by 3%, meaning they owe you $4,850. After processing, the funds are deposited into your account for immediate use.
Sometimes, there are additional fees, such as bank transfer fees, business credit check fees, low-volume fees, and setup fees. It’s important to know what fees are charged before you receive a payment that’s much smaller than you expected.
Finding the Right Arrangement for Irregular Load Volumes
Factoring arrangements and rates are determined by the terms you want and the terms the factor is willing to offer. No two arrangements are identical, which works to your benefit. When your load volumes are irregular, you want to find the best factoring contract for your business.
It’s important to choose a factor that specializes in the trucking industry. It’s also important to be honest that having one truck means your load volumes may be irregular in some months. See what customized arrangement is offered.
We recommend getting several quotes and weighing the pros and cons with each. Ideally, you want to partner with a freight factoring company that has few cons and many pros.
Benefitting From Non-Recourse Arrangements
One question you’ll hear is whether you want recourse or non-recourse factoring. As a small business, non-recourse may benefit your bottom line. It costs a little more, but it’s a form of financial insurance.
With a recourse factoring agreement, you must repay the money you received in advance if your broker or shipper fails to pay as promised. That means you’re financially responsible if your client abruptly closes or files for bankruptcy.
Non-recourse contracts protect you from repayment obligations. They include terms such as the client must have filed for bankruptcy or permanently shut its doors. If you damage the merchandise and the client refuses to pay because the shipment was destroyed, you must refund the factor.
Reducing Expenditures With Freight Factoring’s Extras
You might have office staff handle collections when clients pay late. An owner-operator often handles all invoicing, collections, and other bookkeeping tasks during downtime. It’s no fun spending a day off doing work.
One of the many benefits of factoring is that the factor handles all of that work for you. Invoices are generated and ready for you to upload to your bookkeeping software. Payments are tracked, and the factor handles overdue payment reminders. Focus on your driving and work; your factor has the rest covered.
Free apps often include perks like load-finding boards. Look for work to keep your truck from being empty on the return trip home. Find work on days when nothing is scheduled. Search by location to find per-mile rates that meet your needs.
Another benefit is the fuel discount you get. Each time you fill up, you’re slashing the per-gallon price. That’s more money going back into your company and not some fuel company’s pocket.
Freight factoring specialists offer online tools and apps that make it easy to request payments. Snap a pic of your bill of lading along with your request. The factor processes your request and submits the cash advance. Often, you have the cash advance that afternoon.
Overcoming Minimum Volume Requirements
Sometimes, freight factoring companies have minimum volume requirements. If you don’t meet them, you’re charged an additional fee. That fee can erode your profits, which isn’t ideal. Make sure you understand any fees and your obligations.
If a factoring company offers a load-finding board, you could take extra work to reach the minimum. Lower your risk when working with new brokers and shippers by running business credit checks. Non-recourse arrangements add a layer of protection.
When you choose a factor, look for one that doesn’t require a minimum and lets you decide which clients to send to them and which to handle yourself. You should be able to pick and choose. If you must send every client you have to the factoring company, it might not be the best arrangement for you.
Saint John Capital avoids hidden fees and offers some of the lowest rates in the industry. We allow Customer-By-Customer Basis factoring. Get a free rate quote today to see how advantageous our freight factoring arrangements are.
