companies grow their business. Factoring helps you keep cash on hand for the slow periods and reduces the amount of office tasks you have to do when it comes to generating and sending invoices to clients.
The problem with freight factoring is that there are also a lot of myths involving this service. When people don’t understand something, they tend to shy away from it or believe what others tell them, even if that information is incorrect. We are here to clear up the common myths surrounding freight factoring and help you understand the benefits of this service.
Myth #1: You Lose the Connection With Your Clients
If a freight factoring service leads to you being out of touch with your clients, it’s because you’re not doing your part. You might not be the one sending invoices and chasing payments, but that’s not an excuse to stop reaching out.
It’s important that you stay in touch, check in to make sure everything is going smoothly, and that your brokers and shippers don’t have questions or concerns about your trucking service. You might learn that a driver has been curt with the workers at a loading dock or that a driver deserves commendation for going out of the way to help. This information is important.
Myth #2: Non-Recourse Arrangement Remove All Risk of Non-Payment
One of the most prevalent myths about freight factoring involves non-recourse factoring. A lot of people think that a non-recourse factoring policy ensures you’re protected if your client doesn’t pay. You’ll never have to repay the money you received through the freight factoring company.
It’s not that simple. You are protected if your client files bankruptcy or shuts down unexpectedly. You’re not covered if your client just doesn’t pay because they feel you damaged merchandise or didn’t deliver a load as promised.
Myth #3: Freight Factoring Is Expensive
Freight factoring does have fees involved. You’re paying for the ability to get paid most of what’s owed within a day or two. However, average freight factoring fees in the U.S. are usually in the 3% to 5% range. It does depend a lot on what arrangement you set. Non-recourse factoring has a higher fee than recourse arrangements where you’re obligated to repay if your client doesn’t pay.
The number of trucks in your fleet also helps determine the rates. The more work you do each month, the lower your fees because you’re sending more bills of lading to the factoring company. Still, even at 5%, that’s far lower than the average business credit card interest rate or small business loan product.
Myth #4: Every Client You Have Has to Be Enrolled in Freight Factoring
You have 10 clients, and half of them pay early each month. You’ve heard that once you enter into a freight factoring agreement, every client’s bill of lading must be submitted for payment through the factoring company.
That’s not the case. You can pick and choose which clients are part of your freight factoring arrangement and which aren’t.
Myth #5: Your Clients Will Believe You’re in Financial Trouble
Many companies use freight factoring to make invoicing and bookkeeping easier to manage. Brokers and shippers know that freight factoring is just a sensible way to ensure you have a strong cash flow in the slow seasons and throughout the year.
Myth #6: Your Credit Rating Will Take a Hit
If you take out a business loan or apply for a business credit card, it counts against you on your business credit report. Your score drops, even if it’s temporary, and that can make you look like more of a risk to potential clients.
Freight factoring isn’t a loan or credit product. It never appears on your credit report and will not impact your credit score. It can actually help you pay off debt faster by having money coming in and avoiding late fees and high interest rates.
Myth #7: Freight Factoring Is Full of Hidden Fees
Another myth is that there are always hidden fees with freight factoring. If you do your research, read the fine print, and make sure you understand the terms, you’re not going to encounter hidden fees. A general rule of thumb is never to sign papers if you don’t understand what they’re saying.
A lot of people think that you have to pay extra fees for some of the services that come with a freight factoring agreement. That is not the case. Many companies include fuel discounts, unlimited credit checks, and payment apps free of charge.
Myth #8: Freight Factoring Is Only for New, Small Companies
Freight factoring is not just for small companies or those who are just starting out. It can help any company of any size. Established companies use it to make monthly invoicing easier, and new companies and owner-operators maintain a steady cash flow.
Myth #9: All Freight Factoring Companies Are the Same
Another common myth is that factoring companies are all the same. Since they all do the same thing, they don’t have anything special to offer. Therefore, you don’t need to compare. That’s not true. Companies offer different rates and services with their packages. Always compare rates and use the availability of extra services to find the best fit for your needs.
Make Sure You Understand How Freight Factoring Works
Before you enter into a freight factoring agreement, make sure you know how it works and what your obligations are. Freight factoring is a service where you sell your bills of lading to a factoring company that gives you a cash advance against what you’re owed.
That cash advance isn’t always going to be the entire amount, but you get a big portion that can help cover your expenses like maintenance, fuel permitting licenses, employee wages, benefits, and taxes. This does depend on the company and agreement. Some will pay you 85%, 90%, or 95% and release the remaining balance when your client pays.
After you’ve been paid, the freight factoring company takes over invoicing and collects the money from your clients. As mentioned, there are different types of factoring. If your client never pays, you’ll have to pay the money you received in advance if it’s a recourse factoring agreement. You have protection with a non-recourse arrangement providing your client filed bankruptcy or shut down unexpectedly.
Because you’re being paid, you have a steady cash flow and can keep taking jobs because you have the funds for fuel and maintenance. Keep running loads and submit the next bill of lading to be paid long before you’d get paid with traditional invoicing. Typically, payments come the same day or within a couple of days.
Factoring arrangements reduce the amount of office work you have to do because you’re no longer chasing payments, generating invoices, sending them out, making sure clients received them, and finding out why they haven’t paid you by the deadline.
Use the time you save to market your business. Find new loads, track better routes for your drivers, and keep up to date with business expenses.
TBS Factoring Service has been an expert in the trucking industry for the past 50 years. We’ve helped numerous companies grow through factoring arrangements and we offer a range of services that ensure you can handle your daily routines with ease. Reach TBS online or by phone to learn more.