Trucking factoring is also known as freight factoring or invoice factoring. It is a financial service used in the trucking industry to manage cash flow. It occurs when a company wants to sell its invoices at a discount and receive immediate cash.
When the dill is due, the client pays the factoring company instead of the trucking company. Trucking factoring occurs in the industry because it is an easy way of receiving money when needed without being held to the same standards that a bank would have you. If you need to learn more or help with trucking factoring, visit this website. Here is everything you need to know and understand about the costs and rates of trucking factoring.
Factoring Fee or Discount Rate
Among the most essential things you need to understand about trucking factoring is the discount rate or factoring fee. This is the percentage of the invoice amount that the factoring company charges as a fee. However, this fee can vary depending on various factors.
Some of the things that are considered include:
- The volume of invoices being factored
- The creditworthiness of your customers
- Length of the factoring agreement
- How long it takes for your customers to pay for the invoices
Usually, discount rates range from 1% to 5% of the invoice value per 30-day period. If the invoice isn’t paid in the first 30 days, then it’s possible that the rate increases.
Since factoring companies profit from these transactions, they offer better discount rates for larger volumes of invoices. Consider factoring all your invoices with the same provider to generate more revenue and benefit from lower fees. Yet, if most of your clients settle their debts fast, factoring in every invoice might not be a good move.
Factoring fees aren’t considered interest but rather an interest expense since it improves cash flow rather than waiting out the terms of trade. If you have customers that you aren’t sure how long it will take to pay out the invoices, it might be a good move to consider paying a flat fee to the factoring company rather than letting it charge you additionally after the 30 days have passed.
Not all factoring companies accept upfront flat fees. Most of them work by using variable rates. Yet, with flat fees, you know precisely what the factoring cost will be even if your customers take their time paying the invoices.
Things to Consider About Your Customers and Factoring
What you have to consider regarding your customers is whether or not they have a good payment history. Poor payment history can result in paying higher factoring fees. In contrast, clients who have good credit histories will enable you to receive a lower fee offer when opting for non-recourse factoring.
In non-recourse factoring, the factoring company takes the risk if there are late payments or no payments at all, leaving your business unhindered if there are losses. Yet, since the factoring company takes more significant risks, the factoring fees are inevitably higher.
With recourse factoring, it is the opposite. You must reimburse the factor for unpaid invoices after a certain period.
Advance Rate
When a factoring company accepts purchasing your invoices, they will offer you an advance rate upfront. Advance rates can range between 80% to 95% of the invoice value, depending on the factoring company you decide to work with and your standing.
The remaining percentage, minus the factoring fee, is provided to the trucking company once their customers pay the invoice. To give you an example of factoring costs, let’s assume that the factoring company withholds 2% of your invoice invoice value of $100. You will need to pay $2. If you take 80% of the deal as an advance, you must pay $1.60. Yet, there are other fees related to trucking factoring that you need to be aware of:
Minimum Volume or Monthly Fee
When you collaborate with a factoring company, you may have to meet specific requirements that will affect what fees apply to your collaboration and the rates. In some instances, factoring companies require a minimum monthly volume of invoices to be factored.
A monthly fee will be charged if the volume falls below the minimum requirement. This is why, before collaborating with a factoring company, you must firmly understand whether there are any minimum volume requirements or other additional fees associated with the factoring agreement.
ACH Transfer Fee
Depending on what type of transaction your trucking company uses, there might be an additional fee for using ACH transfers, the electronic bank-to-bank money transfer that most companies use and depend on nowadays.
Before collaborating with a factoring company, it is essential to understand exactly what terms and conditions apply to the ACH transfer usage, mainly since these transactions will occur weekly or monthly. Transfer fees can become costly in a long time.
Late Fees
Late fees can accumulate in time and be costly in the long term, so reading the agreement carefully is essential. In some instances, the late payments won’t affect your company; instead, they fall under the factoring company’s responsibility to manage. In other cases, your company might be charged directly for the late fees.
Knowing all the fees and total costs associated with freight factoring is only half of the things you need to be careful about. The other half that you should focus on is what the factoring company considers a late fee and when it is applicable.
Credit Check Fee
You are factoring companies like to work with companies with good credit histories. Yet, just as important is the credit history of your shipper customers. Sometimes, a fee for checking credit history might be applied.
Termination Fee
Some factoring companies charge for an early termination of the contract. Although it might seem premature to check if termination fees are applicable since you just started your collaboration, it’s good to know this information beforehand.
Many factoring companies require a specific contract length ranging from three months to a year. Signing a long-term contract is not a good idea if you aren’t sure about the long-term collaboration.
Although these are the most common and essential costs you should know about regarding trucking factoring, other taxes, and hidden surcharges might be applicable. Therefore, the best way to know precisely what is the best solution for your trucking company is to consult with a trucking service firm. They can explain everything you need to know about truck factoring and what steps you should take specific to your needs and operations.
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