Freight Factoring Versus Line of Credit – What’s the Difference?

Most people understand the basics of a line of credit. But, what do you know about a handy alternative known as freight factoring? You might find it to be a new concept, but it’s been around for decades. It’s often something people don’t realize is an option when a stronger cash flow could help your business thrive. Explore the differences between a freight factoring arrangement and a line of credit.

What Is Freight Factoring?

Freight factoring is a service where you sell your unpaid invoices to a factoring company for a small discount. You get paid long before your client would typically pay an invoice, which keeps your cash flow strong. Here’s how it works.

Sign Up and Agree Upon the Contract

Sign up with a freight factoring company and go over the factoring rates, requirements on your part, and payment options. Once you’ve completed that process, when you have a potential job, you’ll contact the company and get pre-approval to ensure the factoring company will pay invoices for that broker or shipper.

Pick Up and Deliver the Load

Once you have pre-approval, go pick up the load. When you’re at the loading dock, submit the verification that you’re there and are on your way. You’ll also complete verification when you unload your trailer at the destination. Using a free app, you can easily complete both steps.

Submit Your Bill of Lading for Processing

You’ve completed the job. It’s time to get paid. Submit the bill of lading through the app and wait for final approval. Once it’s approved, you get paid instantly. In many cases, you’ll have payment the same day, so there’s no more waiting or worrying about how you’ll cover the bills when your client isn’t paying on time.

What Is a Line of Credit?

Business lines of credit are loan products banks, credit unions, and other financial companies offer that work differently from a traditional loan. With a traditional business or personal loan, you’re approved for a certain amount and that money is transferred to your savings or handed to you as a check, depending on bank policies. There are factors to consider.

You Don’t Have to Use It All

With a traditional business loan, you get the entire loan (principal) at once. A line of credit works more like a credit card where you make charges against the credit line.

If your bank approves a $20,000 line of credit, you can use up to $20,000. However, you don’t have to spend the entire amount. When you need to borrow money but aren’t certain how much is needed, a line of credit lets you take what you need, which is handy.

Adjustable Interest Rates Create Fluctuating, Sometimes Increasing Monthly Payments

With a line of credit, the financial institution extends a credit line and applies an adjustable interest rate. The interest rate is a calculation of the Federal Prime rate or Wall Street Journal Prime rate plus whatever base rate the bank adds.

If the rate is prime + 5.5%, you’ll be paying 5.5% plus whatever prime rate the bank uses. Some banks use the Federal Prime, while others use the Wall Street Journal Prime. The WSJ Prime is an average of Prime rates used at financial institutions around the nation. The WSJ Prime rate in January 2024 is 8.5%, so a line of credit with a rate of 3.5% plus Prime could end up costing 12%, and that can go up or down each month.

The adjustable interest rate is a very important consideration. If interest rates soar, as has been the case in the past few years, the amount of interest you pay also increases. You might also face monthly or yearly maintenance fees, which add to the amount you have to repay. 

A Line of Credit Has a Borrowing and Payback Period

With a traditional business loan, you borrow money and pay it back in equal monthly payments. As time goes on, more of your monthly payment covers the principal vs. the interest until everything you owe, principal and interest, is paid.

During the borrowing period, payments only cover the interest on charges you make against the line of credit. Once the borrowing period ends, you begin paying back the interest and principal, which can be alarming as the amount due drastically increases.

Which Is Best?

It’s ultimately your decision, as you know your trucking company’s needs best. Freight factoring comes with some important benefits, however. The biggest is the fuel discount you’ll qualify for. 

When you enroll in freight factoring with TBS Factoring Service, you can get a fuel discount card that entitles you to discounts of up to 90 cents per gallon. You can advance money straight to your fuel card throughout the week and enjoy tremendously low prices on every fill-up. 

Freight factoring provides two options for your convenience. With a non-recourse factoring arrangement, if your client doesn’t pay due to poor credit or funding problems, you don’t have to worry. Recourse factoring is the other option. If your customer doesn’t pay, you must repay the amount you were advanced. One has less risk and higher fees, while the other has more risk and lower fees.

Benefits You Receive When Working With TBS Factoring

Freight factoring ensures you get the money that’s due within days or hours of your delivery. There’s no more waiting. And, TBS makes it easier than ever to use our Get Paid® app. 

Once you’ve picked up and delivered your load, use the app’s GPS feature known as Verifast™ to confirm the pickup and drop-off locations, and submit the paperwork straight from your smartphone. Payments get processed quickly to ensure you get paid long before you typically receive the money that’s due.

You don’t pay any sign-up fees and don’t need a high personal credit score to be approved. Once you’re partnering with TBS, enjoy access to the fuel advance program, discount fuel card, and free online business credit checks. Even better, you don’t need to meet a minimum volume requirement.

In addition, Get Paid® allows you to request fuel advances, check your accounts receivable, talk to your account rep, and keep track of your invoices with ease. With Get Paid®, you can always access up-to-date reports on what you’ve been paid, what you’ve submitted for payment, and what’s currently being processed.

TBS possesses more than 50 years of expert knowledge in the trucking industry. Whether you’re just starting out or have a large fleet, our representatives help you get paid fast for the work you do. You work hard getting loads delivered on time, and we believe you shouldn’t have to wait 30 or 60 days for payment after a job well done.

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