Invoice factoring is growing in popularity as a preferred funding solution to support trucking operations and fuel growth. Yet despite being a mainstream financial strategy, most truck company owners fail to understand the real cost of factoring when negotiating terms. Instead, they focus on just the factoring rate as the deciding feature when choosing a factoring company to partner with – this is a costly mistake.
Invoice factoring is not a new concept, in fact it is thousands of years old with its origins dating back over 4,000 years. This ancient financing practice has survived the centuries because of its powerful ability to leverage the untapped value of accounts receivable invoices to speed up cash flow. Enhanced with technological innovations to accelerate the speed of funding, invoice factoring has evolved to its most efficient state during this new millennium. This continuous advancement in efficiency has benefitted trucking companies enormously as a select few factoring companies have fine-tuned features and benefits to make the lives of truck company owners easier. Freight factoring is a specialized form of invoice factoring designed specifically for the trucking industry. Of the many advantages of using this powerful cash flow solution, one of the greatest benefits is the low cost per dollar feature of freight factoring.
It’s not just the rate, but the cost per dollar that counts
A main concern for many trucking company owners is to focus on the freight factoring rate when negotiating a factoring agreement. Although this is an important consideration, it is only half of the equation. The real cost of factoring is determined not only by the rate, but also by the amount of the “Advance” and any additional costs or fees. Let’s first take a look at how freight factoring works, then take a closer look into the three components that affect cost.
How freight factoring works:
- Deliver a load, invoice the customer and send copy invoice to the factoring company.
- The factoring company pays an Advance within 24 hours, transferring funds directly into your account. The balance owing is held as a Reserve.
- The factoring company collects full payment from your customer and releases the Reserve transferring funds directly into your account.
- The factoring fee is deducted from either the Advance or the Reserve and the transaction is complete.
The three components that impact cost:
Freight factoring rate: The factoring rate (factoring fee) is a percentage of the invoice face value. A rate of 3% or less is considered competitive.
The advance: The amount of money paid out within 24 hours of submitting an invoice. The amount is expressed as a percentage of the invoice face value. A rate of 85% or higher is considered a high advance rate. The remaining balance is called the Reserve.
Additional costs and fees: Additional costs associated with the transaction of funds. A reputable factoring company will disclose any additional costs that add to the overall cost of funding. No surprises and full transparency is a hallmark of a trusted financial provider.
The whole purpose of factoring invoices is to accelerate cash flow, therefore the higher the advance rate the better. Truck company owners need as much cash upfront as possible to sustain operations and fund new business opportunities. The reverse is true for factoring companies – the higher the advance rate, the higher their exposure to risk. When negotiating the cost of factoring, a factoring company will balance the freight factoring rate against the advance rate to determine a suitable risk level that they are willing to manage. To illustrate how this balance affects the true cost of factoring, let’s look at how to calculate the cost per dollar and two examples to compare.
How to calculate cost per dollar
Cost per dollar = factoring fee / advance amount
For the purpose of comparison, the following two funding examples have the same invoice amount and all the same terms except for the advance rate.
Invoice amount to be factored = $1,000.00
Freight Factoring Rate = 3%
Freight Factoring Fee = $30.00
Factoring Company 1 – Example
Advance Rate = 85%
Amount Advanced = $850.00
Cost Per Dollar = $30.00/$850.00 = $0.0353
Factoring Company 2 – Example
Advance Rate = 95%
Amount Advanced = $950.00
Cost Per Dollar = $30.00/$950.00 = $0.0316
As shown above, the cost per dollar is greatly influenced by the Advance Rate: Example 1 is nearly 12% higher than Example 2.
To satisfy customers wanting higher advance rates, a factoring company may increase their rates to meet this requirement yet maintain the risk level they are willing to manage. Using the example above, Factoring Company 1 would have to increase their freight factoring rate from 3% to 3.36% to match Factoring Company 2 higher advance rate.
For truck company owners, the task is to select a factoring company that has the resources and financial stability to provide the highest advance rate at the lowest freight factoring rate.
How to choose the best factoring company for trucking
Selecting a factoring company to partner with is an important step in securing steady, reliable funding to support the success of your trucking company. Finding a reputable factoring company that provides the best balance of low freight factoring rates and high advance rates is critical to protecting your bottom line, but there is more to consider. Following is a checklist of features to look for in your factoring company:
- Does the factoring company provide dedicated customer service to streamline funding and ensure convenient services?
- Is the qualification process fast and simple to permit first funding within a few days of applying?
- Does the factoring company specialize in trucking? Knowledgeable staff trained in transportation are equipped to expedite funding more efficiently to avoid delay or disruption.
- Does the factoring company provide free credit checks to better avoid bad debt from customers unable to pay their freight bills?
- Does the factoring company provide a fuel discount program to save on your company’s largest operating expense and improve your bottom line?
Get the most for the least
To short cut through the list of factoring companies present in today’s market, concentrate on those that specialize in trucking. Freight factoring companies are financial specialists dedicated to serving the trucking industry. Their organizations are structured to serve the fast paced and highly demanding needs of busy trucking companies. Freight factoring companies have the systems, tools and work practices designed specifically to address the unique challenges that often bar trucking companies from achieving steady, reliable cash flow. Because they are specialist to just one industry, their resources are focused on achieving fast reliable funding at the lowest cost per dollar compared to other invoice factoring companies who service multiple industries.
For more information about the benefits of freight factoring and how to get the most for the least, visit eCapital.com