What you need to know about this financing option for trucking companies.
If you own a trucking company, chances are you’ve found yourself in this situation: You want to take on more jobs but can’t foot the upfront costs because your last customers haven’t paid up yet. That’s where freight factoring comes in. This type of financing gives you an advance on part of your unpaid invoices to keep your business running smoothly and foster growth.
What is freight factoring?
Freight factoring is a type of accounts receivable financing specifically designed for trucking companies. Here, your business sells its unpaid invoices to a third party to get a portion up front, known as an advance rate. Advance rates are typically between 80% to 95% of the invoice’s value. After your customers pay off their invoices, you get the rest of the funds, minus a fee. There’s no interest or monthly repayments, and its a relatively hands-off process.
Smaller companies can typically qualify for spot factoring, which lets you choose specific invoices to factor and works similar to a line of credit. Larger companies with a high volume of invoices tend to qualify for contract factoring, which is an all-or-nothing deal. Many freight factoring companies also require your business to sign a contract for several months
Freight factoring can be great for trucking businesses that are looking for quick access to cash to grow, or larger businesses that want to secure predictable cash flow. It’s also one of the few types of financing that puts more weight on the customer’s creditworthiness rather than the business owner’s. This means it’s open to businesses owned by individuals with less-than-perfect credit without the high cost of most bad-credit business loans.
What's the difference between freight factoring, freight bill factoring and trucking factoring?
Simply put, nothing. Lenders generally use them to mean the same thing. Regardless of which term your lender uses, ask how its factoring option works. Especially with factoring, each lender has its own unique way of operating and can have different requirements for you, your customer and your invoices.
Costs to expect
Freight factoring usually comes with something called a discount rate. When you factor your invoices, you’re essentially selling them to a third party at a discount. The discount rate is the difference between their full value and the amount of money you get up front. Typically, the discount rate runs between 2% to 5% per month for smaller trucking companies that have less than $20,000 or $30,000 in monthly invoices.
Larger trucking companies can often get a lower discount rate, between 0.5% and 5% a month. However, you’re more likely to have additional fees like an upfront origination fee around $500 or penalties if your trucking company doesn’t meet the lender’s minimum invoice amount.
How freight factoring works step by step
- Transport goods for a customer and send them an invoice. Freight factoring companies typically require your invoices to be due within 90 days.
- Send your invoices to a factoring company. Many companies allow you to do this quickly online — sometimes even through their mobile app.
- Get your advance rate. Some factoring companies can get your business its advance as soon as the next business day.
- Wait for your customers to pay off their invoices. Your customers pay off their invoices directly to the factoring company.
- Get what’s left after the discount rate. Rather than paying the discount rate, your factoring company subtracts it from the rest of the payment.
Which providers offer freight factoring?
Generally, you have two options when it comes to freight factoring: a factoring company that offers general invoice or accounts receivable financing or a company that specializes in freight factoring. Let’s take a look at how some of the top factoring companies stack up.
|Funding speed||Advance rate||Requirements|
|Rivera Finance||As soon as one business day||Up to 95%||Must have verifiable accounts receivable.|
|RTS Financial||As soon as one business day||Up to 97%||Must have invoices due within the next 90 days.|
|BlueVine||As soon as one business day||85%– 90%||Must be in business at least 3+ months, have a personal credit score of at least 530, and have a monthly revenue of $10,000 or more.|
Compare more business loan providers that offer factoring
How to determine if freight factoring is right for my business
Ask yourself these questions to tell if your business might qualify for freight factoring:
- Do I own the right kind of business? If you have anything other than a trucking company, you’ll want to look into invoice factoring instead.
- What do I need financing for? Since most freight factoring companies require you to sign up for at least six months, it’s not a great option if your business only needs to cover a one-time expense.
- What’s the source of my business’s cashflow problem? If the no-brainer answer is “invoices,” then you’re in the right place. Otherwise, you might want to check out some alternatives.
- How much financing do I need? Calculate how much money your business needs to keep things running smoothly. Make sure your unpaid invoices can cover that need.
Alternatives to consider
Don’t think freight factoring is right for your business? You might want to take a look at these alternatives.
This option might be better for companies that need more funds upfront. Invoice financing lets your company get closer to 100% of its invoices’s value right away — minus a fee of 2% to 5% of its value. As your clients pay you back, you pay off your loan.
This means that your business gets to keep control of your invoices and maintain a regular relationship with your clients. But if a client fails to pay off an invoice, it’s your business that eats the cost — only sometimes the case with factoring companies.
How invoice financing can work for your business
Line of credit
Don’t have enough invoices to solve your business’s cashflow problem? A credit line might be more useful. Similar to a credit card, a credit line gives your business access to a range of funds whenever it needs it. Some lenders even offer debit cards that your business can swipe at a store or online. Credit limits can range from as low as $2,000 to as much as $5 million, depending on your business type and financing needs.
Each time you draw from a line of credit, it typically turns into a term loan that your business has between six months and five years to pay back. These come with interest rates that usually range from 7% to 25% and an origination fee, often between 0.5% and 5% of the loan amount.
How business lines of credit work and where to get one
For businesses that only have a one-time cost like replacing old equipment or repairs, a business term loan might make more sense. These are loans at their most basic: Your business borrows a fixed amount and repays it in installments over a set period of time, often between one and five years — though your business can often find shorter and longer term options.
These loans come with interest instead of a flat fee, which adds up over time. Typically business loans come with interest rates in the ballpark of 7% to 30%. Business loans also often come with an origination fee of 0.5% to 5% of the loan amount, which your lender deducts before you get your funds.
Freight factoring is a specific type of accounts receivable financing designed to help trucking companies. It can be helpful if unpaid invoices have stopped your business from reaching its full potential. However, if invoices aren’t the source of your business’s cashflow problem — or you don’t have one — you might want to look into other options.
One good place to start is our business loans guide. There you can learn about a wide range of business financing options and even start comparing lenders.
Frequently asked questions
Image Source: Shutterstock