Line of Credit vs. Freight Factoring: The Best Option for Your Business

It doesn’t matter how big or small your trucking company is. Every company has experienced clients who do not pay on time. When that happens, it makes it hard to keep up with your own expenses, and that can harm your business’ reputation and credit rating.

To avoid periods where there is no money coming in due to slow-paying clients, trucking company owners often use a line of credit or freight factoring to cover the gaps. At TBS we are committed to helping you find which is the best option for your company?

What Is a Line of Credit and How Does It Work?

  A line of credit is a loan product where you are approved for a specific spending limit and given a credit card that draws against that limit. You have a draw period when you’re allowed to make purchases, pay bills, etc. from the credit line. When the draw period ends, repayment of the amount you borrowed begins. Until that point, most banks make you pay just the interest.

A line of credit is handy in that you build a positive credit history with each payment you make on time. It’s also very easy to use. If you don’t use the full amount, you only pay interest on the amount you did use.

But, there are also downsides. Your credit score impacts whether or not you qualify and how high your interest rate is. It also typically requires you to have owned your trucking company for a set number of years. If you’re just starting out or just purchased an existing trucking company, it’s unlikely you’ll qualify.  Your business’s annual revenues also impact whether or not you qualify.

The other downside to a line of credit is that the interest rate is adjustable rather than fixed with most banks. That means six months from now, you might be paying much more in interest than you were when you applied. You could also pay less, but it’s impossible to know for certain until you get the notification that the interest rate is changing.

What are the interest rates on a business line of credit? They vary. Plus, it depends if you choose an unsecured or secured loan. With an unsecured loan, you pay more but do not offer any collateral that the bank can take possession of if you fail to pay it back. With a secured loan, you provide collateral that the bank claims if you fail to pay. The bank then sells that item to get the money you owe.

Focusing on banks that many in the trucking industry rely on, the following rates were collected on June 19, 2024, and important qualifications for each are included

  Secured Terms Unsecured Terms
Bank of America 9.5% and up Must have been operating for two or more years with a minimum of $250,000 in annual revenue 10.75% and up Must have a 700 minimum FICO score, have been in business for two years, and have $100,000 or more in annual revenue
Chase Depends on your credit rating Must pay 1% of the balance plus interest each month during the draw period No information shared  
Huntington Bank Depends on your credit rating Only available in 11 states and companies with poor credit histories do not qualify No information shared  
PNC Depends on your credit rating Annual fee of 0.25% of the credit line, collateral must be assets not related to real estate Depends on your credit rating $175 annual fee, payment must be set up for auto-draft from a PNC account,
TD Bank Prime (currently 8.5%) + 0% Monthly payments are set up for auto-draft No information shared  
Wells Fargo Prime + 0.5 Must have a minimum of $2 million in annual sales Prime + 1.75% for businesses with two or more years in business or Prime + 4.5% for less than that No annual fee for the first year and must have a FICO score of 680 or better


What Is Freight Factoring and How Does It Work?

Freight factoring isn’t a loan product. You do not need to have a positive credit rating or pay back a loan over time. Instead, you sell your unpaid invoices to the factoring company at a discount.  The factor pays you that day or within a couple of business days depending on when you submit your request.  You get the cash immediately, and the freight factoring company invoices your client for you and collects the amount due.

Most factoring arrangements provide you with a percentage of the money upfront and the balance once your broker or shipper pays. There’s also a fee charged for this service, and that fee varies. On average, it’s not likely to have fees over 5%,  so it’s already much lower than a line of credit interest rate.

Here’s a breakdown of how the process works. Imagine you’ve signed an agreement where you get 90% now and the remaining 10% when your client pays. The fee is 3%. You just completed a run and the amount due is $20,000.

Send your bill of lading to the freight factoring company using their app.

The company processes your request.

If approved, you’re paid 90% of the amount due after the fee is removed (a 3% fee on $20,000 is $600, so you’d get 90% of $19,400, which is $17,460. Your bank may charge a transfer fee, but we’re not covering that in this example.)

Your client pays the invoice a month later so you’d get the remaining $1,940 at that time.

What happens if your client doesn’t pay? It depends if you have a recourse or non-recourse arrangement. If your client went bankrupt or suddenly shut down, you would have to repay the money you received if you had a recourse arrangement. A non-recourse arrangement protects you from repayment, but the fees are slightly higher.

Tips for Choosing the Right Solution For Your Trucking Company

Ask yourself these questions to decide which is best for your business.

  • How strong is my current cash flow?
  • What do I have to do to qualify?
  • What are the overall costs?
  • How do I access the funds?
  • Are additional services offered?
  • If I run into problems, how accessible is the customer service team?

Ultimately, the choice is yours. Do you prefer working with a local bank and paying today’s high interest rates in order to build your credit score? Do you prefer the idea of same-day payments, lower fees, and having no impact on your credit score?

Often, freight factoring is the better option due to lower fees and overall costs, fuel discounts, access to load-finding boards, and steady cash flow. TBS Factoring has more than 50 years in the trucking industry, which means we understand the industry and all you do better than most bankers.

You’re not obligated to factor every invoice with TBS. Feel free to pick and choose. Are you ready to start getting paid the same day? Sign up in minutes online. All we need is your DOT number, company name, business contact, and email address.

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