Factoring vs. Quick Pay: Which is Better for Trucking Companies?
Struggling with cash flow? You're not alone. As a trucking company owner, cash flow is key to keep trucks moving and business thriving. Financing options exist to help you manage cash flow. But with so many options out there, how do you choose the best one for your company? Today, we'll dive into two popular solutions: factoring and quick pay. By the end of this article, you’ll understand both options and be able to make informed decisions.
Understanding Factoring
What is Factoring?
Factoring is a financing option where you sell your open invoices to a factoring company. You get paid the same day. The factoring company waits to get paid in line with your payment terms (i.e. NET30, NET60, etc.). This offers instant cash flow as you face your large upfront expenses.
Related: The Complete Freight Factoring Guide for Trucking Companies
Benefits of Factoring
Immediate Cash Flow: One of the best advantages of factoring is the access to instant cash. Instead of waiting for customers to pay, you get your money within 24-48 hours.
No Debt Incurred: Factoring is not a loan, so you don't incur debt. This can be a huge relief for trucking companies that want to avoid added liabilities.
Professional Credit Checks and Collections: Factoring companies handle credit checks and collections. This frees up your time to focus on running your business.
Scalability: Unlike traditional loans, factoring grows with your business. This provides necessary funds as your need for cash flow increases.
Easy Qualification: Factoring is easier to qualify for than traditional loans. Approval focuses on your customers' credit, instead of your own.
Flexibility: Factoring lets you choose which invoices to factor. This gives you more control over your cash flow.
Pro Tip
Look for factoring contracts that are shorter in length. Multiple-page contracts provide more space for companies to hide fees or terms.
Drawbacks of Factoring
Costs and Fees: Factoring companies charge fees to provide their money and services. These fees vary based on the company and agreement terms. It's important to understand these costs upfront. The main fee is the factoring fee, which is a percentage of the invoice amount. Examples of other fees some companies charge include but are not limited to:
Direct deposit fees
Wire fees
Monthly minimum fees
Invoice processing fees
Due diligence fees
Early termination fees
Potential Impact on Customer Relationships: Some customers may not want to deal with a factor. But, in the trucking industry, this is very unusual, because factoring is so common.
Understanding Quick Pay
What is Quick Pay in Trucking?
Quick Pay is a service offered by some brokers or shippers that pays companies faster than standard terms. This service often involves a fee. But, it can be a handy choice for those who need quick cash.
Benefits of Quick Pay
Faster Payment: Quick Pay usually means getting paid within a few days. This is faster than the standard 30-90 day terms.
Simplicity and Ease of Use: Quick Pay is easy to use. You'll submit your invoices as normal. To elect Quick Pay is as simple as checking a box when submitting your invoice.
Drawbacks of Quick Pay
Lower Payment Amounts: Like factoring, Quick Pay involves a fee. You'll end up getting less than the full invoice amount.
Limited to Select Brokers or Shippers: Only some brokers and shippers offer Quick Pay. This can limit your options when trying to maximize cash flow.
Comparing Factoring and
Quick Pay
Speed of Payment
Factoring: Often you receive payment within 24-48 hours, if not the same day. The industry trend is working toward instant payment.
Quick Pay: Payment is usually received within a few days, depending on the broker or shipper.
Cost Comparison
Factoring: Fees can vary, but they generally range from 1% to 5% of the invoice amount. By dealing with 1 company, you’ll know your cost on every invoice. It's important to shop around and compare rates.
Quick Pay: Fees also vary, often ranging from 1 - 3%. Some brokers may charge fees as high as 5%. By dealing with multiple companies, your fees will vary from customer to customer.
Flexibility and Control
Factoring: You choose which invoices to factor. This provides more control over you cash flow.
Quick Pay: Not offered by all brokers and shippers. For those that do, terms are set by the broker or shipper. This can limit flexibility and restrict your load options.
Impact on Business Operations
Factoring: Factors handle credit checks and collections. This can simplify processes and reduce administrative work.
Quick Pay: There is no middle man or third party. This offers a simpler process but less support.
Organization
Factoring: Factors often provide detailed reports and account management tools. This helps you stay organized and keep track of finances.
Quick Pay: Brokers or shippers may not offer the same level of detailed reports. Organization is up to you.
Industry Help
Factoring: Factors have a vested interest in your success. Their business does better when your business does better. Those that specialize in the trucking industry can provide valuable insights and support.
Quick Pay: The same type of partnership does not apply with brokers and shippers. They may not provide the same level of industry-specific support.
Making the Right Choice for Your Trucking Company
Factors to Consider
Company Size: Smaller companies may benefit more from the support factoring companies offer. Larger companies with established customer relationships may prefer quick pay.
Volume of Invoices: High volume of invoices might make factoring more cost-effective. This is due to economies of scale and administrative efficiency.
Customer Relationships: Quick pay is a great choice when offered by customers who you have a strong relationship with.
Financial Stability and Cash Flow Needs: Review your financial situation and cash flow needs to decide the best payment option.
Recommendations
When to Choose Factoring: A great choice for those with urgent cash flow needs, want to avoid debt, and prefer others to manage receivables.
When to Opt for Quick Pay: The way to go for those that work with customers who offer it and prefer a simpler, faster payment process.
Hybrid Approach: Some trucking companies use both methods strategically. For example, if one or more customers offer great Quick Pay terms, and others do not, then you can factor those accounts.
Frequently Asked Questions
What is the difference between factoring and quick pay?
Factoring involves selling your invoices to a third party for immediate cash. Quick pay is a service offered by brokers or shippers to get paid faster, usually for a fee.
What are the typical fees for factoring and quick pay?
Factoring fees generally range from 1% to 5% of the invoice amount. Quick pay fees are typically around 1% to 3%, but can be as high as 5%. Quick pay fees will also vary from customer to customer.
Can I use both factoring and quick pay simultaneously?
Yes, some trucking companies use both methods at the same time. This can maximize cash flow and flexibility. When doing so, you'll need to choose which accounts to factor and which to use Quick Pay. You cannot bounce back and forth between the two. For factored accounts, the factor will be setup as the payee in the customer's accounting system.
What are the required documents for factoring and quick pay?
Factoring requires a rate confirmation and proof of delivery. You will also need to approval of your customer's credit before submitting.
Quick pay requires the invoice and proof of delivery sent to your customer.
Can I factor invoices from multiple brokers?
Yes, you can factor invoices from multiple brokers with approved credit. This gives you more flexibility in managing cash flow.
Can I switch from quick pay to factoring if needed?
Yes, you can switch from quick pay to factoring if your needs change. But you are not able to bounce back and forth between the two for a given account. It's important to review your options and choose the best solution for your situation.
Conclusion
Managing cash flow is key to the success of your trucking business. Either of these payment options can help you keep your trucks moving and business thriving. Review your needs, consider the pros and cons of each, and make a decision that best fits you. If you need personalized advice, we're here to help. Don't hesitate to reach out for a consult.
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About Transwest Capital
Transwest Capital has specialized in factoring for trucking companies since 2007. We are committed to delivering exceptional customer service to help our clients succeed.
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