Is It Worth the Rate?
Just as many carriers will choose the company with the lowest trucking factoring rates, even more will forgo freight factoring entirely because they want to get the best profit margins, and giving a portion of their invoice away may not be conducive to this. However, waiting days, weeks or even months for payment is not an ideal financial situation to be in, either. Companies who partner with factoring businesses often do so because:
- They have access to their profits almost immediately to finance future jobs, pay off bills and otherwise expand their business.
- They do not have the staff or expertise to manage billing alongside other aspects of their business.
- They cannot get similar financing from a bank or another financial institution.
What Types of Factoring Impact a Factoring Rate?
Understanding what goes into a factoring rate is helpful when shopping around. The biggest factors that influence how much factoring companies charge are:
- Businesses stability: How long a trucking company has been in business and the number of active trucks it operates can influence the factoring rate. A newer trucking company may pay higher factoring company rates to start, whether it is classified as an owner-operator or has a large fleet of vehicles.
- Volume: The volume of freight hauled and factoring planned can determine the factoring rate. Generally, the more you factor, the lower your rates. Similarly, a larger and more expensive shipment is likely to attract a lower percentage fee.
- Monthly revenue: Typically, factoring companies with higher total monthly revenue tend to have lower rates than those with less income.
- Duration of agreement: The length of the factoring agreement may have an influence on your rates. Contractual relationships that span longer may have lower rates than relatively short contracts.
- Type of freight factoring rate: The type of freight factoring rate, whether recourse or non-recourse factoring program, directly impacts the rate. Recourse factoring is usually less costly than non-recourse factoring. We’ll discuss this in detail below.
- Payment turnaround time: Factoring companies have fewer risks when brokers pay on time. Therefore, you’re likely to get better rates if the broker delivers within the industry average payment period. Factoring companies may also charge additional fees for unpaid invoices beyond contracted times.
- Additional fees: It’s important to review your factoring agreement to ensure there are no hidden charges. Some factoring companies include extra fees in the factoring rate depending on the kind of service you request. Such fees may include application and onboarding fees, invoice processing fees, electronic payments, fuel advance fees and monthly maintenance fees.
Typically, factoring costs are lower for established trucking companies that have been in business for multiple years, haul a large volume of freight and have high monthly revenue.
Types of Freight Factoring Rates
There are two types of factoring rates — flat rates and variable or tiered rates. Each type has the potential to alter the freight factoring rates, depending on your agreement structure. Let’s consider them in detail:
1. Flat Rates
This is the most common type of trucking factoring rate. It’s a one-time fee that stays the same regardless of how long the invoice remains unpaid. The rate may vary depending on whether the factoring company provides recourse or non-recourse factoring.
2. Variable or Tiered Rates
Some factoring companies adjust their rates depending on how long it takes your customer to make the payment. For instance, if the standard rate for payment made within a 30-day period is 2%, the factoring company may charge an additional 0.5% for every 10-day delay. Usually, the factoring company pays you a percentage of the invoice and adds the balance minus the factoring and other fees once the broker pays the invoice.
How Are Freight Factoring Fees Calculated?
Once a carrier has been onboarded, it will send its freight bill to the factoring company. The freight factoring company will then minus their rate from the unpaid invoice and advance it to the carrier under the agreed-upon payment terms.
Here’s an example. A factoring company and broker or carrier may agree on a 3% rate for a $7,000 invoice. That brings the factoring fee to $210. The factoring company may then pay the broker $6,790 upfront and claim the $7,000 from the customer.
However, the payment method and fee calculation may change depending on the agreement between the factoring company and the carrier. For example, the contract may stipulate that the factoring company will only pay a certain amount upfront and pay the balance after receiving the money from the customer.
Such arrangements reduce the risk for the factoring company and can also influence pricing. Additionally, if the agreement includes extra charges, the factoring company made add them after computing the base factoring fee.
What Are Common Freight Factoring Fees?
There may also be additional fees added for wires and ACH direct deposits. Those fees vary between freight factoring companies. When you sign up with a freight factoring company, you should know exactly what they charge to avoid being surprised with hidden fees. Other factors that may impact how a freight factoring rate is calculated to include:
- Application/sign-up fees: Before you establish goodwill and credit with a factoring company, you may have to pay an application or sign-up fee. This fee covers the time it takes them to review your application and get your partnership up and running.
- Termination fees: Some factoring companies will include a termination fee in the agreement that you are responsible for paying if you were to end the contract early.
- Minimum volume requirements: Based on the factoring agreement, your trucking company may have to pay a fee if don’t maintain a certain monthly volume.
- Advance fees: If your trucking company needs advanced factoring, some factoring companies will charge an advance rate.
Factoring companies that charge any fees without warning are ones you should avoid working with.
The Cost of Non-Recourse and Recourse Factoring
Non-recourse and recourse factoring both offer different benefits depending on your trucking company’s preferences.
1. Non-Recourse Factoring Costs
A non-recourse factoring agreement protects a trucking business if a shipper or broker doesn’t pay on time or at all. The freight factoring company will incur all risks in that situation and take the hit, and the trucking company will not be charged back.
Most factors will credit check brokers before agreeing to work with them to avoid working with bad debtors. You may also incur higher fees when you agree to non-recourse factoring to mitigate some of the risk. The factor will also handle all back office paperwork, invoice handling and collections in this agreement.
2. Recourse Factoring Costs
In a recourse agreement, the trucking company is responsible if a broker or shipper doesn’t pay on time or at all. There is usually a portion held in a reserve account until the broker or shipper pays the factoring company. A trucking company can add billing assistance to this agreement but is responsible to make collections on their payments.
How to Get the Best Freight Factoring Rates
As you weigh your options for freight factoring, understand that not all companies are created equally. Some of them come with better features, while others have better rates. Very few will offer the best solutions for all your needs. Give yourself the best chance at finding the right partner for you by:
- Researching many companies: You’ll find plenty of factoring companies ready to make money off your invoices, but how many of them will truly have your best interests at heart? Ultimately, your trucking factoring company will handle your money and contact your customers. Ensure they are trustworthy enough to do so while also giving you all the assistance you need.
- Reading contracts carefully: As we’ve mentioned above, so much more than invoice percentages can go into a factoring company’s rates. Your contract should outline all these fees in explicit terms, allowing you to prepare and anticipate the size and frequency of your charges.
- Being ready to negotiate: Not all factoring companies will be open to negotiation, but if there are certain contract terms that give you pause about moving forward, it can’t hurt to discuss them. Freight factoring companies are built to work for you, and the right one will be willing to talk about options and create an agreement that works for both parties.
Benefits of Working With a Freight Factoring Company
The main benefit of freight factoring is getting consistent business growth and avoiding common cash flow problems. Without working with a freight factoring company, a carrier or owner-operator typically has to wait 30 days to 90 days to get paid on a load. A freight factoring partner will pay its carriers within 24 hours after sending in their freight bills. This helps trucking companies grow their business and stay on top of payments.
Other benefits of working with a factoring company are the additional benefits they offer. The best factoring companies will offer more than just fast payments. At Porter Freight Funding, we offer a dispatch network with pre-approved freight brokers and shipper options to find you the best-paying loads. Our clients also have access to insurance partners, compliance help and free fuel cards with advances and discounts.
For more information on how Porter can help your trucking company grow, call us at (205) 397-0934 or contact us to apply today
