How to Choose the Best Freight Factoring Company for Your Trucking Business
Introduction to Freight Factoring Company Selection
If you’re running a trucking business (or about to get started), you know the importance of cash flow to keep rolling. Freight factoring is a financing option that can help you get paid faster and keep your business running smoothly. But with so many freight factoring companies out there, how do you choose the right one for your business? In this article, we’ll walk you through the factors to consider when choosing a freight factoring company and provide tips on how to research and compare different companies.
Factors to Consider
When choosing a freight factoring company, there are several factors to consider. Here are some of the most important ones:
Fees and Rates
Freight factoring companies charge fees and rates for their services. These fees can vary widely depending on the company and the services they offer. Often times rates may be presented in a way that appear favorable, but upon further review, the finer print will demonstrate them to be less favorable. Here we will look at some of the different fees factoring companies charge, and how the structure can impact the true cost of factoring.
Factoring Fee
An invoice factoring fee is the primary fee charged by a factoring company for the services they provide in converting outstanding invoices into immediate cash for businesses. This fee is typically a small percentage of the total invoice amount and is deducted by the factoring company from the funds advanced to the business. This fee may be a fixed rate or a tiered (variable) rate.
Tiered rate factoring adjusts the factoring rate based on the aging of the receivables. As invoices become older, the rate gradually increases, providing a fair reflection of the risk associated with older invoices. This method offers savings for invoices paid in a timely manner, but also creates some unpredictability that may make the service more costly.
Flat rate factoring offers a simple and transparent fee structure. With this method, the factor charges the same fee regardless of how long it takes your customer to pay the invoice. One significant advantage of flat rate factoring is the predictability it offers, as businesses can accurately determine their cash flow and make informed decisions to fuel growth.
Example:
To help illustrate this point, let’s look at a simple example assuming a $10,000 Net 30 invoice. The table illustrates what the factoring fee would be for a 3% fixed rate vs. a 1% tiered rate for every 10 days the invoice is outstanding:
One final consideration often overlooked is the amount of time it takes for payment to be received and cleared. For example, even if your customer sends payment on Day 30, there may still be a number of days for the check to be received in the mail and then cleared with the factoring company’s bank. This can make a tiered rate more costly than anticipated.
Setup Fee
Some factoring companies may charge a one-time setup fee when establishing a new factoring relationship. This fee covers administrative costs associated with account setup, due diligence, and initial documentation.
Monthly Minimum Fee
A monthly minimum fee is a set amount that a factoring company charges its clients every month, no matter how many invoices they factor. It ensures a reliable income for the factoring company regardless of the client’s monthly factoring volume.
Funding Fee
A funding fee may be charged by the factoring company for each funding transaction. This fee covers the costs associated with the immediate advance of funds against the invoices, including processing and underwriting costs. Fees may vary according to the funding method (i.e. wire transfer, ACH, fuel card). Companies can save money on funding fees by “batching” multiple loads in one funding request.
Invoice Fee (Invoice Processing Fee)
In addition to the fee charged for each funding, a factoring company may charge a fee for each invoice processed. The purpose of invoice fees is to cover the cost of services rendered by the factoring company, including credit risk assessment, collections, and administrative tasks.
Early Termination Fee
If a client decides to terminate the factoring agreement before the agreed-upon term, an early termination fee may be charged. This fee compensates the factoring company for the financial and administrative impact caused by the early termination.
Credit Check Fee
In some cases, a factoring company may charge a fee to perform credit checks on customers before providing funding against their invoices. This fee covers the cost of running credit reports and assessing creditworthiness. In other cases, many factoring companies will not charge these fees; rather they will provide them as a value-added service within their factoring fee.
Final Note About Factoring Fees
It's important to note that the specific fees charged by factoring companies may vary, and not all companies charge fees in every category listed above. It's advisable to review the factoring agreement and discuss all potential fees with the factoring company before entering into any contractual agreement.
Advance Rates
Advance rates in factoring refer to the percentage of the invoice value that a factoring company advances to the client at the time of invoice purchase. There are two types of advance rates: full advance and partial advance.
In a full advance, the factoring company advances the client the entire invoice amount less the factoring fee. On the other hand, a partial advance involves the factoring company advancing a percentage of the invoice value, typically ranging from 80% to 95%. This remaining amount, known as the reserve, is held by the factoring company until the invoice is paid by the customer. Reserves act as a buffer for the factoring company against potential customer non-payment or disputes.
Factoring Advance Rate Example
Scenario 2: 90% Advance
Invoice Amount: $10,000
Factoring Fee: 3%
Terms: Net 30
Day 1: $9,000 advance ($10,000 - $1,000 reserve)
Day 30: $700 reserve payment
($1,000 reserve - $300 factoring fee)Total amount received: $9,700
Scenario 1: Full Advance
Invoice Amount: $10,000
Factoring Fee: 3%
Terms: Net 30
Day 1: $9,700 advance ($10,000 - $300 factoring fee)
Day 30: No additional payment
Total amount received: $9,700
As shown in the example above, a full advance, as opposed to a partial advance, allows businesses to access a larger portion of their funds immediately, providing them with even more flexibility and resources needed to effectively manage their operations.
Customer Service
All too often, rates are the only factor considered in freight factoring company selection. Customer service is often overlooked, but bad customer service can have severe impacts on a business. When a factoring company fails to provide quality and timely customer support, it can disrupt the cash flow of a company and hinder its growth.
Bad customer service can also be costly and offset any potential rate savings. Consider this recent example. The factoring company’s failure to collect on behalf of the trucking company caused the company to miss out on $8,000 for almost 5 months, additional fuel costs, and a painful amount of time spent in collection efforts.
Good customer service is essential when it comes to freight factoring. You want to work with a company that is responsive, helpful, knowledgeable, and easy to work with. Here are a few questions you may want to consider when evaluating a factoring company’s customer service:
¡Llama hoy! (877) 741-1301
What are their business hours? How do they align with your schedule? Some factoring companies even provide 24/7 support.
How responsive are they? Are you put through to voicemail every time you call or are you receiving help from a live, personable, and responsive representative?
Can they communicate in your preferred language? Some factoring companies have bilingual or even multilingual staffs.
How knowledgeable are they? Are they experienced working with your clients or similar clients?
The transportation industry can be highly unpredictable, with various challenges and time-sensitive demands. Offering prompt and reliable customer service ensures that your concerns are addressed efficiently, minimizing disruptions to cash flow.
Value-Added Services
Freight factoring companies offer a range of value-added services that go beyond simply providing cash flow solutions. These services often include credit checks to assess the creditworthiness of potential clients, fuel cards to help manage fuel expenses, and fuel advances to ensure smooth operations for truckers on the road.
Contract Terms
The contract terms offered by freight factoring companies can vary widely. Some companies require long-term contracts, while others offer more flexible terms. Make sure you understand the terms of the contract before signing up with a company. Look for a company that offers flexible terms that work for your business.
Different types of contract terms available in factoring contracts include:
Contract length: A factoring agreement will typically include a financing period, after which the agreement includes an auto-renewal. Typical financing period lengths are month-to-month, semi-annual, and annual.
Termination Notice Period: In order to cancel a factoring contract or switch factoring companies, you typically need to give written notice during a pre-determined termination notice period. Such examples include 30-, 60-, or 90-day periods. This period must be given close attention, because a contract can auto-renew and you may be “locked in” if this goes overlooked.
Monthly Minimums: Some factoring companies may charge a monthly minimum fee if monthly factoring volumes do not meet a minimum threshold defined by the factoring company.
Recourse vs. Non-Recourse Factoring: In recourse factoring, the factoring company can recourse or return any unpaid invoices back to the client if unpaid within a specified period. The client is responsible for any bad debts. With non-recourse factoring, the factor assumes the risk of non-payment, and if payment is not received, the factor absorbs the loss.
Notification vs. Non-Notification Factoring: In notification factoring, the factoring company notifies the debtor about the assignment of the invoice to the factoring company, and the debtor makes payments directly to the factoring company. With non-notification factoring, the factor does not notify the debtor about the assignment of the invoice, and the client collects payments and remits them to the factoring company.
Funding Speed
One of the main benefits of freight factoring is that it can help you get paid faster. Look for a company that offers fast funding options so you can get the cash you need when you need it.
Industry Experience
Finally, consider the industry experience of the freight factoring companies you’re considering. Look for a company that has experience working with trucking businesses like yours. They will be better equipped to understand your unique needs and provide the services you need to succeed.
Researching Freight Factoring Companies
Once you’ve identified the factors that are most important to you, it’s time to start researching freight factoring companies. Here are some tips to help you get started:
Checking Online Reviews
Examples of advertiser disclosures
One of the best ways to learn about freight factoring companies is to read online reviews. Look for reviews on sites like Google, Trustpilot, and the Better Business Bureau. Pay attention to what other trucking business owners have to say about their experiences with different companies.
Avoid sites with “Advertiser Disclosures”, references to “receiving compensation”, or content that is “reader supported.” This means that the website is receiving a commission for every lead they provide to the factoring companies listed, and the reviews are not objective customer reviews.
Asking for Referrals
Another way to find a good freight factoring company is to ask for referrals from other trucking business owners. Reach out to your network and ask for recommendations. You can also ask your industry associations or trade groups for recommendations.
Researching the Company’s History and Reputation
The IFA member directory helps search for reputable member factoring companies by industry expertise and location.
Before signing up with a freight factoring company, do your research. Look into the company’s history and reputation. Check to see if they have any complaints filed against them with the Better Business Bureau or other regulatory agencies.
Another great resource is the International Factoring Association. The IFA sets forth a code of ethics for its members, and those who don’t meet these requirements are disallowed from membership. They also have a member directory that allows you to find factoring companies by industry expertise and their location.
Comparing Multiple Companies
Finally, make sure you compare multiple freight factoring companies before making a decision. Get quotes from several companies and compare their fees, rates, contract terms, and to the extent that you can, the people that you will be working with. Don’t be afraid to negotiate to get the best deal for your business.
Making a Decision
Once you’ve done your research and compared multiple companies, it’s time to make a decision. Here are some tips to help you make the right choice:
Weighing the Pros and Cons of Each Company
Make a list of the pros and cons of each freight factoring company you’re considering. Consider the fees, rates, customer service, contract terms, funding speed, and industry experience of each company.
Considering Your Business’s Unique Needs
Think about your business’s unique needs and how each freight factoring company can meet those needs. Consider factors like the size of your business, the types of loads you haul, and your cash flow needs. Additional factors that may be considered include things like technology (including assistance with technology), onboarding support, and location of the factoring company.
Negotiating Contract Terms
Don’t be afraid to negotiate with freight factoring companies to get the best deal for your business. Ask for flexible contract terms and lower fees or rates if possible.
Conclusion
Choosing the right freight factoring company is an important decision for your trucking business. By considering the factors outlined in this article and doing your research, you can find a company that meets your needs and helps your business thrive. Remember to weigh the pros and cons of each company, consider your business’s unique needs, and negotiate to get the best deal.
Looking for a freight factoring company? We would love an opportunity to earn your business. Since 2007, we have helped trucking companies with their freight factoring needs. We offer same-day funding, low rates, and no hidden costs. We provide full advances and flexible contracts. Our fuel card programs provide massive savings on fuel. We offer free credit checks and no hidden fees or minimums. Join us and take your trucking business to the next level!