For the past couple of years, people have watched interest rates climb and keep climbing as the Fed continued to increase the Federal Funds rate. Rates went from being near zero for many years and increased 11 times in 2023 in hopes of stopping high inflation. It’s currently at 5.5%, 1.5% greater than in 2022, and it has put a squeeze on consumers, which impacts trucking companies as purchases decline.
Turbulent financial times impacted freight forwarders and brokers, too. So far in 2023, three major brokerages have filed bankruptcy, one company shut down completely, and others have laid off a substantial number of employees. For a trucking company owner, this is alarming. When a company shuts down completely, it puts you at risk of not getting paid for the work you did.
Freight factoring offers a better way to get paid as quickly as possible. One thing you should look into during a turbulent economy is a non-recourse factoring arrangement.
How Freight Factoring Works
Freight factoring is a service where you sell your invoices to a firm that provides you with a cash advance for a fee. Here’s how it works.
- You or your driver picks up a shipment and delivers it to the proper location.
- You submit the bill of lading to a freight factoring company for payment that same day.
- The factor analyzes the request, transfers the money (minus any fees) to your debit card or bank account, and invoices your client.
- Your client pays the factor instead of you.
That’s the basic premise, though there is a little more to it. There are different factoring arrangements. If you have an agreement where you get 90% of the amount due up front, that leaves 10% unpaid. Once your client pays the invoice, the remaining 10%, minus fees, is transferred to you. Some arrangements pay all 100%, minus the freight factoring fees, and others pay 85%, 90%, 95%, etc.
Suppose your broker has to pay you $10,000 for work you did on the 2nd day of the month. You’d rather get paid now, but the client only pays invoices on the 1st of the month, so you have a full month to wait. It’s a bit of a struggle to have to wait that long.
Say you agree to a 95% factoring arrangement that has a 5% factoring fee attached to it. That puts the fee at $500. After the fee, you’d get $9,500. Receive your $9,000 now and the remaining $500 when your client pays at the end of the month.
However, you’ve received this cash advance with the understanding that your client will pay as promised. What if your client doesn’t pay? That’s where recourse, non-recourse, and mixed arrangements come in.
A recourse arrangement means you are responsible for repaying an invoice that wasn’t paid. Then there is a non-recourse where the factor swallows the loss if your broker files for bankruptcy or shuts down unexpectedly and won’t ever pay the money owed.
Each of these options determines the total fees you pay. Less risk means higher fees, but if you take on all of the risk, the freight factoring fees decrease. You have to decide whether you’re comfortable with high fees and less risk or lower fees and higher risk.
If your client doesn’t pay, you could be responsible for returning all of the money you were advanced. When you’re already struggling financially, this demand for repayment can be distressing.
The Benefits of Non-Recourse Factoring
As a business owner, you need to improve your cash flow and ensure you have the money needed to maintain your trucks, pay your employees, and cover office expenses, rent, and business loans. If you can’t do this, you’re going to be stressed and your credit score can take a major hit. A poor credit rating makes you look bad to potential clients, and it means you’ll pay more on loans to grow your trucking company.
When you have a poor credit score, interest rates can be substantially higher. BankRate lists origination fees for business loans of 4% or higher. If you have excellent credit, you pay between 0.5% to 1.5%. You save around 3% in interest, which is a lot of money over time.
Non-recourse factoring helps with your cash flow, but it also offers many other benefits. Starting with the ability to skip some time-consuming office work. When you hire a freight factoring company, you get faster payments, which is a big benefit. More importantly, you no longer spend hours printing and mailing or emailing invoices, tracking payments, and chasing down companies that haven’t paid on time.
The factor creates invoices that you can upload to your bookkeeping software. Save time and energy and put your office staff on other important tasks like marketing and scheduling. The freight factoring company also handles the administrative duties of chasing payments and tracking when they’ve been paid.
As you’re being paid quickly, you avoid late fees on your business loans, business credit cards, and fines if you can’t pay your employees on time. You save a lot of money on these fines and late fees, which often cost more than the fees you pay for freight factoring. Get paid faster and start collecting interest as soon as possible.
What Non-Recourse Factoring Won’t Help With
Your driver delivered damaged goods and the broker won’t pay. A non-recourse agreement won’t help you in this situation. It’s also not going to help if you get caught up in a scam or fraud.
If you received advance payment from a freight factoring company and one of those situations kept the broker from paying an invoice, you must pay back the funds you were advanced. Non-recourse will not protect you under these circumstances. It’s only there to help out if the broker files for bankruptcy or shuts down.
Saint John Capital is also proud to offer free credit checks for our clients. This is instrumental in mitigating potential risks in addition to the benefits and protections that our non-recourse factoring clients receive.
Protect your business with a non-recourse freight factoring arrangement. You don’t have a crystal ball, so it’s hard to tell when the economy will truly stabilize. The Fed is suggesting things are getting better and that rates will start dropping in 2024, but until it happens, it’s hard to know if consumers will feel comfortable buying again, and it’s consumer demand that plays a big role in the trucking industry.
Saint John Capital is a trusted, expert freight factoring company with decades of experience in the trucking industry. Ask us about non-recourse arrangements to learn more about protecting yourself when the economy and trucking industry aren’t as stable as you want.