You’ve heard the term invoice factoring while trying to find a faster way to get paid. You’ve also seen freight factoring popping up in the same search. You’re confused and don’t understand what the differences are. Are they the same thing?
Both freight factoring and invoice factoring are ways to get paid quickly, but while they have that in common, they also have some differences. Learn more about each one to better decide what would most help your company get paid quickly.
How Invoice Factoring Works
Invoice factoring is a different form of financing where you “sell” your unpaid invoices to a third party. That third-party company (invoice factoring company) pays you a percentage of the amount due then and there. The invoice factor then waits to be paid, thus getting the money you were paid back.
What percentage are you paid? It varies from one company to the next, and there are also different options within a factoring arrangement. You might have one offer for 100% payments, but you might not be able to get a non-recourse option with that. Other options might be 90%, 95%, etc. This money that’s held back is eventually paid to you when your client pays the invoice.
Suppose you have an agreement for 90% and the fee is 2%. Your client owes you $10,000. The fee on that is $200, so you’d get paid $9,800 in all, but you’re only getting 90% until the client pays. You’d get $9,000 now. Once your client pays, the remaining $800 is released to you.
Why would an invoice factoring company do this? You will pay a fee for the service. So, you get the cash now and no longer have to wait weeks or months, which makes it easier to pay your bills. The invoice factoring company makes money off each invoice, which keeps their business solvent.
How much of a fee do you pay? It depends on the arrangement. In the U.S., they usually range from 1% to 6%, depending on the company and the number of invoices you sell.
The invoice factoring company does take on some risk. If your client never pays, the factor could be out of that money. This depends on the agreement between the factoring company and your business. Your factoring fee takes this risk into consideration.
If it’s non-recourse, you’re off the hook. If it’s recourse, you’re responsible for paying back the money you received when selling that invoice. Some companies offer a combination of the two. You’d have to pay back part of the money, and the invoice factoring company is responsible for the other part.
Invoice factoring benefits are plentiful and include:
- Same-day payments
- No impact on your credit rating
- Avoided risk of non-payment
- Steady cash flow
- Less work chasing down payments
- Anyone who invoices clients can use it
How Freight Factoring Works
This brings us to freight factoring. It’s a form of invoice factoring, but it’s different. Think of it this way, a receptionist, salesperson, and mechanic are all employees at an auto dealership, but they have very different roles within that business. The same is true of invoice factoring and freight factoring.
Freight factoring specializes in the trucking industry. Independent truck drivers and trucking company owners have a bill of lading in hand after a load is picked up and the delivery is completed. That bill of lading replaces the invoices used in invoice factoring.
Instead of taking the time to draw up invoices, you sell the bill of lading to a freight factor and get paid the same day or within a few days, depending on the arrangement. Some of the terms are the same. You have recourse and non-recourse arrangements, and you pay a fee for the service.
But, freight factoring arrangements can be made when your driver picks up a load and sets off to the destination. You won’t get as high a percentage of the amount due at this stage, but it’s handy if you’re short on cash and trying to keep up with bills while you grow your business. Otherwise, you submit the bill of lading after it’s safely delivered.
Freight factoring rates also vary from one company to the next. Many have rates as low as 1%, and it’s uncommon to see them in excess of 5%. In this case, rates are based on how many trucks are in your fleet. How the fees work and how you get paid are the same as in invoice factoring. You might get 90% right now or all 100%. Much of it comes down to the arrangement you make with the freight factoring company.
As rigs require diesel or gas to run, you may find a freight factoring arrangement is beneficial as many factors have gas cards available that offer fuel discounts at participating truck stops and fueling stations. Same-day payments are often made to these cards, so you save money on fill-ups and get paid to a card that can be used to fill fuel tanks and pay for items like meals, truck repairs, and travel expenses.
Freight factoring companies often have extra services that make it much easier to run your trucking company. Those services include:
- Invoice creation for quick uploads to your accounting software
- Free business credit checks
- Load finders to help find more work
- Real-time load tracking
- Low-interest lines of credit
- Click & Pay API
How Do You Choose the Best Freight Factoring Company?
What are the keys to finding the best freight factoring company? Start by comparing rates and ask if same-day payments are available. Ideally, you want to have your cash as quickly as possible. If you have to wait several days, it can be less advantageous than a company that pays you the same day you submit the bill of lading.
If you have to cancel your factoring contract, are you going to be penalized? It’s important to ask. If you have clients who pay on time, do you have to submit those bills of lading with the factor, or can you continue to handle their invoices on your own? Ideally, you want to take care of trusted clients on your own and not send those to the factoring company.
Saint John Capital is the freight factoring company you need. We only factor for trucking companies, so we understand your needs better than invoice factors. We have been members of the International Factoring Association for over a decade and have more than 20 years of experience in the freight factoring sector.
Factor some of your bills of lading and skip others. We don’t force you to use freight factoring for clients you know will pay you on time. If you want to take on new clients and need to run a credit check on them first, we offer that free service.
Saint John Capital’s competitive rates and 100% factoring advance rates help us stand out against the competition. Give us a call or fill out the form online to learn more about factoring your trucking invoices and getting same-day payments as you grow your trucking business.