Growing your trucking business is your priority in the new year. You’ve narrowed down your choices to freight factoring or obtaining a line of credit. You’re most familiar with a line of credit, so isn’t that the better option? Not necessarily.
Financial decisions can make or break a business. If business slows down or costs drastically increase, it can force you to raise rates to levels that reduce your ability to stay competitive. Finances are everything to a growing business. Carefully consider the pros and cons of both before you jump in and take an unnecessary risk.
What Is a Line of Credit?
A line of credit is a loan product that you can access when needed. You apply for the loan product and wait to see if you’re approved for the amount you need. You get the credit line to tap into when required. If your truck breaks down and you need repairs, you’re not worried about coming up with the money in a lump sum. You charge the repairs to your line of credit and pay it back over time.
There are unsecured lines of credit and secured ones. An unsecured line of credit doesn’t require you to offer collateral. If you don’t pay back the loan, the bank or lender can send your account to a debt collector, but they can’t take possession of your trucks, business, or other assets. Secured lines of credit require you to put up something for collateral. If you don’t pay the loan back, you could lose your trucks, trailers, or other tangible goods.
The payment on a line of credit is determined by the interest rate and amount of credit you’ve used. You can take out a line of credit and never use it, but you can use it all up and suddenly find yourself stuck. You need more money, but the line of credit is tapped out. The more you’ve used, the higher your payment, too. You have to pay the loan back by the repayment date.
To apply for a business line of credit, you fill out an application and provide your business information. A credit check is usually run to check that you are responsible and not already heavily in debt. Don’t be upset if the amount you’re approved for isn’t as much as you wanted. You can start small and prove you’ll pay it back. When you have a small credit line, make small purchases, and pay it off on time, your credit profile improves, making it easier to get larger credit lines in the future.
Pros and Cons:
- It helps you build a strong credit portfolio.
- You may not qualify for as much as you’d hoped.
- Interest rates are usually more favorable than credit card interest rates.
- Applications are not guaranteed to get approved.
- Once approved, you have a checkbook or credit card to use to access the line of credit instantly.
- Interest rates vary from one lender to another. (One national lender sets rates at prime plus up to 9.75%.)
- Unsecured loans usually do not allow you to have more than $100,000, though that varies between lenders.
- There can be fees if you want to renew your line of credit and annual fees for that line of credit.
How Freight Factoring Works
Freight factoring is a process where you sell your invoices to a freight factoring company. You submit your open invoices to this company for immediate payment. The company pays you the money that’s due minus a small processing fee. You don’t undergo a credit check, and there’s no extended wait to get approved.
Suppose your drivers have delivered ten loads this month, and you’re due a total of $50,000. You invoice the different brokers or shippers and wait a month or more to receive the money you’re owed. Meanwhile, your accounts are dwindling, increasing your anxiety. Will you have the funds available to pay your drivers until payments arrive?
Submit your invoices through the freight factoring app. Scan your bills of lading, submit them, and the company processes them and sends you payment. Often, payments are submitted that day.
Payment is made to your bank account or a debit card, whichever you prefer. This makes it possible to have a steady flow of income available for fuel, repairs, salaries, insurance, rent/mortgage, etc.
With freight factoring, the only wait is for the electronic transfer to go into your bank. If you have payments made to a debit card, it’s possible to get same-day funding. There’s minimal wait, which reduces your stress.
Not every freight factoring company pays 100% of your invoices. Some may only offer to pay you 85%, 90%, or 95%. Once your client pays the invoice, the balance is sent to you. Saint John Capital offers 100% advances if you need the total amount immediately.
There are two forms of freight factoring to consider. Recourse factoring involves having to repay the freight factoring company if your broker or shipper fails to pay them. Ideally, enter into non-recourse freight factoring contracts. If your client doesn’t pay the freight factoring company, it’s not your problem. The factoring company takes on all of the risk.
Pros and Cons:
- Payment is made quickly, often on the same day.
- You are charged a fee for freight factoring.
- Costs for freight factoring vary, but Saint John Capital’s factoring rates range from 1% to 1.95%.
- You’re not obligated to submit all of your bills of lading for freight factoring. Pick and choose the clients you want to factor and then invoice those you don’t want to factor.
- Freight factoring companies often have fuel cards that extend fuel discounts to help you save extra money.
- Some companies offer free broker and shipper credit checks to help you decide if a load is worth taking.
How Do You Choose?
How do you choose if freight factoring is best or if a line of credit is better for your company? Do you have solid credit so far? If so, a line of credit can be advantageous as you should qualify for the lowest possible interest rate and favorable repayment terms. If you’re just starting, a line of credit can help you build a business credit history.
Start with a small line of credit, prove you’re trustworthy, and ask for a higher line of credit after that. You do need time to apply and wait for lender approval. If you need money now, freight factoring is best.
Freight factoring often has more advantageous factoring rates and fees. It also puts money in your hand the same day or within a few days. It’s much faster.
Would both a line of credit and freight factoring help you achieve the business growth you want for your trucking company? It’s something to consider.
Saint John Capital specializes in both lines of credit and freight factoring. Our lines of credit offer low-interest rates and affordable repayment terms. We also provide several tools to help your trucking company grow. Use our software to track loads, assign loads, and find loads. Our Click & Pay API makes it easy to submit bills of ladings and receive payments.
Reach out to us. Let our experts at Saint John Capital help you arrange the best financial plans to run your trucking business and ensure you have a steady flow of income. Apply for a freight factoring account online. It’s free, and our fees are the lowest you’ll find.