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Riding the Waves of Change: Navigating Freight Factoring Amidst Current Economic Shifts

Since the pandemic hit, the economy has succeeded in some areas and not thrived in others. Federal interest rates (5.25% to 5.5%) are at the highest they’ve been since 2006 when they hit 5.25%. It’s not the highest it’s been. In January 1981, it hit 19.08%. 

Since then, Federal interest rate increases try not to go too high too fast. Any interest rate increase makes it harder for people to afford everything from gas to groceries. It also makes it harder for businesses like trucking companies where there are seasonal fluctuations in work. 

When the Motor Carrier Act of 1980 passed, it led to deregulation of parts of the trucking industry. In turn, it increased the number of trucking companies in the nation. The government had less control and fewer regulations, so it was easier for start-ups, which you’d think was great. But, it also increased competition, which meant pay went down.

Just like today, companies struggled with higher interest rates and low wages. To stay competitive when prices rise because of rising interest rates, freight factoring can help.

How Does the Current Economy Impact Freight Businesses?

Right now, it’s tough for some companies, including smaller trucking firms, to keep up with bills. BusinessLoan rates take the federal interest rate and add more to it. The prime rate is an average of three leading banks’ loan rates, and it’s generally about 3% higher than the federal interest rate.

Credit card companies go even higher and may add upwards of 14%. If you carry a balance on business credit cards during the slower trucking season, it’s getting expensive. It can make it very hard to afford increased maintenance costs, groceries/meals, and insurance.

With increased competition and higher prices, many trucking companies are struggling. During a slow period, you need a continual flow of cash. Freight factoring arrangements ensure there is a steady flow of cash, and when it’s busy, you can set aside money to cover the slower periods. They don’t have the strong cash flow needed to stay afloat. This is where freight factoring can help.

How Does Freight Factoring Can Mitigate Economic Challenges?

To understand how freight factoring helps, you need to understand how it works. It starts when you deliver a load to a customer. Normally, you’d take the bill of lading and go to your office to generate an email that you’d mail, fax, or email to your client. You then wait 30, 60, or 90 days for payment, depending on your terms. 

With freight factoring, you submit a bill of lading as soon as you pick up or drop off a load. The factor purchases the invoice and pays you the amount due, minus the freight factoring fee. You do pay a fee that’s typically less than 5%, but you get the money that same day or within a day or two, depending on your bank’s processing times.

Because you have immediate access to cash, you no longer run the risk of bad debt due to late payments or inability to pay your insurance renewals, driver wages, and important expenses like truck loans, rent, or business loans. 

You also enjoy the benefit of not having to deal with the repetitive task of generating invoices, tracking down late payments, and going to the bank to deposit checks. All of the invoicing is handled by the freight factoring company, and you just have to upload those invoices to your bookkeeping software. 

Most freight factoring companies also provide additional services that help with business growth. Look for arrangements that include services like these.

  • Business lines of credit
  • Click & Pay API
  • Debit cards with gas discounts
  • Free business credit checks

Finally, you’re in great financial shape because you have a constant flow of cash. That helps you leverage better rates on everything from loans to business credit cards. You also look better to brokers and shippers as you don’t look like a financial risk.

How to Use Freight Factoring Strategically

Freight factoring is a strategic move as long as you take time to understand your options and create a program with advantageous fees. You have a few factors to consider.

  • Recourse vs. non-recourse – Do you want to have to repay the money you received if the client never pays due to bankruptcy or sudden closure? If not, non-recourse protects you from repayment in those situations.
  • Advance rates – Do you want 100% of your funds or are you okay with a portion like 85%, 90%, or 95% and wait to get the balance when your client finally pays? If you could get a portion as soon as you pick up a load and haven’t completed the delivery, would you want to?
  • Monthly minimums – Sometimes, the arrangements made with a freight factoring company need to meet a monthly minimum. If you fall short, you face a financial penalty. In a slow period, this may not be ideal.

Get to know the freight factoring company and maintain a strong business relationship. You don’t even have to have a question. You could just check in to say thanks or share news on how much the company has helped you. 

Maintain a strong business credit score. Pay your bills on time. Limit how much debt you accrue. If you do have to pay a bill late, which is going to impact your credit score, be ready for higher loan rates and the potential business loss from companies that check your credit report before hiring you.

Don’t have just one client. You might have two steady clients, but you never know. Have a diverse client base and always keep looking for new clients. You might find another broker or shipper who also pays on time, but the rates you get are higher, so you’re making more money with less work.

Choose the Best Freight Factoring Specialist For Your Business

The best freight factoring company is one that offers low rates and additional beneficial services. Services like free business credit checks, gas discounts, and business lines of credit all help with trucking business growth by helping you keep expenses down and make wise decisions when taking on new clients.

At Saint John Capital, we’ve specialized in the trucking industry since 1997. In that time, we’ve helped thousands of trucking companies expand into national fleets. In addition to factoring arrangements, we also provide a range of services like free business credit checks that help you make wise decisions when taking on new clients. Talk to us about freight factoring and other helpful freight services.

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