Invoice Factoring vs. Freight Factoring: What’s the Difference?

Any business needs a strong cash flow to survive and thrive. But, it’s hard when clients pay invoices late. If you’re sending invoices the first week of the month and not getting paid for 60 or 90 days, it’s tough to keep up with your expenses. This is where invoice and freight factoring come in. 

With a factoring arrangement, you sell your unpaid invoices to a company for a discounted price. You get immediate cash, which makes it easier to grow your business and stay current on bills. You do lose a little money to the factoring fee, but it’s usually not much more than 5%, which is far less than the current credit card and business line of credit interest rates.

What is the difference between freight factoring and invoice factoring? Why would a trucking company choose one over the other?

The Basics of Invoice Factoring and How Freight Factoring Differs

With invoice factoring, you work with a factoring company and submit your unpaid invoices for them to process. The underwriting team looks at the invoice, checks your client’s credit rating, and approves or denies your request for immediate payment.

If it’s approved, you get immediate cash. You no longer wait weeks or months to get paid. You don’t need to rely on high-interest credit cards or business lines of credit to cover bills until you finally get paid. With most invoice factoring arrangements, you get the money within a day or two, but sometimes, you receive the money the same day you submit the request.

There are two main types of invoice factoring: recourse and. non-recourse factoring. The fees differ because recourse requires you to repay the money if your client doesn’t pay, which means there’s less risk for the factoring company. 

Non-recourse protects you from having to repay the money if your client unexpectedly shuts down or files bankruptcy. It’s less risk for you, but more risk for the factor, which means the fees involved are higher.

The factoring fee is deducted from the amount you’re due. If the fee is 5% and you’re owed $10,000, the fee would be $500. It’s worth it when you compare it to the interest and late fees you face if you don’t pay your bills on time. Plus, late payments impact your credit score, making it harder to get business loans for new equipment or property improvements in the future.

That’s the basics of invoice factoring. How does freight factoring differ?

It’s a specialized form of invoice factoring that’s only for trucking businesses. Because it’s specialized, additional services are available. Those services benefit trucking company owners and their drivers. Services like fuel discount cards help you save money. VeriFast GPS-enabled check-ins make it easier for drivers to alert staff when they’ve dropped off or picked up a load.

Submitting bills of lading through the app provides fast, hassle-free payment requests. You no longer have to generate invoices. The freight factoring company does it for you, and you can upload the invoice to your bookkeeping software. Free business credit checks make it easy to research the creditworthiness of new clients, too.

Because the invoices for trucking companies might take 30, 60, or even 90 days with some clients, you gain the benefit of having immediate payments and a constant flow of money to cover truck maintenance, emergency repairs, and fuel. You also keep up with your driver’s wages and any insurance and permits that are required to stay on the road.

When Should You Choose Freight Factoring Over Invoice Factoring?

Honestly, it’s a personal choice, but we can’t imagine a trucking company not wanting to take advantage of the fuel discounts and free business credit checks that freight factoring companies provide. If you’re saving 10, 15, or even 20 cents on every gallon that goes into your fleet, it adds up quickly.

Freight factoring companies also have experience specifically in the trucking industry. That makes it easier for you to get advice as you grow your business. You have a wealth of knowledge to tap into as you read the blogs, watch the videos, and talk to the customer support team.

The other reason to consider freight factoring is that some established brokers and shippers are suddenly shutting down without much, if any, warning. The last thing you want is to drive across the country for a company and submit an invoice to learn a week or two later that they’ve shut down. A non-recourse agreement protects you against those unexpected closures.

Other Services That a Freight Factoring Company Offers

Freight factoring companies generally offer additional services like business debit cards with fuel discounts, help finding the lowest insurance rates for your fleets, and even apps that track the lowest fuel prices in cities and towns across the U.S.

Some offer business lines of credit loan products. Those might be worth considering, but they are loans that must be paid back. They’re often used to continue to pay bills on time in the slow months, but there are things you have to keep in mind.

Consider the fees and interest involved. Many trucking companies use a business line of credit to protect against slow cash flows. Right now (May 7, 2024), interest rates on business lines of credit range from 3% to 39.9% according to LendingTree. Business credit cards range from 15.24% to 29.99%. None of that compares to freight factoring fees that are usually under 5%.

How Do You Choose the Best Freight Factoring Specialist?

Reviews are a good place to start, but remember some people leave falsified reviews or put an honest review on the wrong company’s site. For example, suppose there are two area businesses. One is called ABC Marketing and the other is ABC Market. Consumers don’t always double-check the business name before they leave a review. 

Until Google and other search engines do a manual deletion of the incorrect review, people might unfairly judge the company. Don’t believe every review you read as being factual.

Look at the company’s longevity. The longer they’ve been in business, the happier clients tend to be. Longevity is the sign of doing things well.

TBS is a specialist in freight factoring. We have more than 50 years of experience in the trucking industry, so our expertise goes far beyond purchasing your unpaid freight invoices. We can also help you with some of the more challenging aspects of owning and managing a trucking company. Talk to us about getting the best gas discounts and affordable insurance rates for your trucks.

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