One question we hear often is if invoice factoring and freight factoring are the same things? While they’re similar, they also have key differences. Think about it in this way. A dog and a cat are both animals, but they’re not the same at all. Freight factoring may be part of invoice factoring, but it’s a specialty that fits a particular need.
What is Invoice Factoring?
Invoice factoring involves the sale of your unpaid invoices to a factoring company. For a fee, the factoring company takes the invoices you sell, pays you a percentage of the money due then and there, and gets to work on collecting the money owed by your client. If the client doesn’t pay on time, the factoring company chases down the payment. It’s one less thing for your office to take care of.
Any business that has invoices can use a factoring company to get immediate payments. Many different companies offer invoice factoring services, and each one has specific rules. Some may pay you 100% of the money due, while others may hold back 5%, 10%, or 15% and pay the balance when your customer pays. Fees for this service also vary. Some companies may factor for a fee of 2%, while others may offer services for a 5% fee.
How does it work? Say you’re a plumber and your customers get an invoice when you complete the job. Your invoice terms require payment within 30 days. Ideally, you want your customers to pay immediately, but it’s not always the case. You may not see any of the money that’s due for four weeks. Meanwhile, you have staff to pay, equipment and vehicles needing repair, and fuel costs for the trucks that drive to the clients’ locations.
Imagine you have $20,000 in unpaid invoices, and one of your work trucks breaks down. You need the cash to pay the repair bill, but your customers are holding off payment until the end of the month. You either have to find a mechanic that will fix the truck now and wait until you get paid, or borrow from somewhere else to get that truck back on the road. It can be a tricky financial position, especially if you’re starting up and don’t have a large cash reserve.
An invoice factoring company would buy those $20,000 in invoices and pay you the total amount of the invoices minus the factoring fee. If that fee is 5%, you will get $19,500 of the $20,000 right now. Factoring can be an intelligent way to ensure you have a flow of revenue throughout the month.
Any business can use invoice factoring to have a steady flow of revenue. Your business may be an auto parts warehouse that has to wait for mechanics to pay invoices after receiving parts. You might own a wedding venue and get final payments after the wedding. With a factoring company handling the invoices, the pressure is off you to chase down late payments.
How Does Freight Factoring Differ?
Freight factoring is very similar. The difference is that the company factors your bills of lading. Each time you complete delivery for your shipper or broker, you get the signed bill of lading proving the delivery was made. That bill of lading is needed to get paid. A freight factoring company buys your bills of lading and pays you for the loads you’ve hauled.
Why not just chase down payment on your own? You have trucks in your fleet that need fuel. You have drivers to pay. If any truck needs maintenance or repairs, those expenses add up. Having just one truck down for service can be costly. With freight factoring, you get payments immediately and keep your business running effectively.
Freight factoring works the same way. The factoring company takes a percentage of the amount due as a fee. You should learn if it’s a recourse or non-recourse arrangement. If your broker or shipper doesn’t pay, a recourse agreement would have you paying back the money that the client failed to pay. That can be detrimental, especially if you’re trying to grow your fleet.
Tips for Finding the Best Freight Factoring Company
How do you find the best freight factoring company for your trucking business? Finding a non-recourse arrangement is best, but you may pay a higher fee. Still, it’s worth it if you aren’t certain a new client will pay on time.
Ask if the company offers free credit checks. Growing a business is challenging when you’re not sure who to trust to pay invoices on time. With free credit checks, you get a peek into a company’s history. It’s not a guarantee that they’ll pay on time, but there are far higher odds of getting paid by a company with a solid history of on-time payments.
Look at the fees charged by the factoring specialist. If the fees seem too high for your comfort, keep looking. Ask about hidden fees, as they can turn a low rate into one that’s too high for your liking. A freight factoring firm with flat rates is often better than one with varying rates based on monthly quotas.
Finally, find out if other services are offered to help your trucking business grow. Some companies have apps you can download and use to get instant payments or find loads to haul. One of the biggest wastes of money and time is having drivers return to your area with an empty truck. Look for jobs that ensure the drivers always have a load. You gain more money from the extra work, and that helps your trucking company succeed.
Saint John Capital offers all of those protections. You get free credit checks, flat fees, and protection against companies that don’t pay your invoice on time. Whether you have a brand new trucking company or have a large fleet, our freight factoring services help you keep money coming in and take the stress off your business office personnel. We also offer the added benefit of an extensive database of shipping jobs that you can sign up for today to make sure your drivers never have an empty truck.