How much do freight factoring companies charge?
Freight factoring companies, also known as trucking factoring companies, operate similarly to other factoring companies, and you can expect similar rates and fees. Rates vary by company, but they usually start between 1% and 5%, and many freight factoring companies charge a lower rate for invoices that are paid quickly.
Can you work with more than one factoring company?
No. You can only work with one factoring company at a time because it is otherwise too difficult to determine who has the first right to your company’s outstanding invoices. To establish the first right on your receivables, factoring companies file a UCC lien so they can start collecting your invoices.
Can I switch factoring companies?
Yes. If you switch to a different factoring company but still have outstanding receivables, you must arrange a buyout in which the new factor purchases the remaining invoices. Additionally, the UCC liens must be changed so the new factoring company establishes first right. Switching factoring companies can be an expensive process, especially if you signed a long-term contract with the original company.
What is invoice financing versus factoring?
Many people use the terms “invoice financing” and “invoice factoring” interchangeably, but they operate very differently. A factoring company purchases the right to the value of your accounts receivable, whereas with an invoice financing company, you borrow against the value of your accounts receivable but still own your invoices.
What is recourse versus nonrecourse factoring?
The main difference between recourse and nonrecourse factoring is who is responsible if your customer doesn’t pay their invoice. With recourse factoring, you are responsible for your customers’ unpaid invoices, though your rates will be lower for the added risk. If you work with a recourse factoring company, make sure your clients have a good credit history.
On the other hand, with nonrecourse factoring, you are not responsible for late or unpaid invoices. Rather, the factoring company accepts the risk, though nonrecourse factoring is more expensive than recourse factoring.
Are factoring companies regulated?
In the United States, invoice factoring companies are not regulated by a formal government body. However, many factors are members of associations that self-regulate their practice, such as the International Factoring Association or the Secured Finance Network (formerly known as the Commercial Finance Association).
How is invoice factoring different from a bank loan?
When using invoice factoring, you’re selling your unpaid invoices to a factoring company, which is different from requesting a bank loan from a financial institution. Bank loans require you to pay back principal and interest over a certain time period, and your funding potential is limited. Approval is determined by your company’s credit history, unlike invoice factoring, which is based on the credit strength of your clients.
How can factoring help a company manage its cash flow?
Factoring has many advantages for small businesses, and a big one is helping manage cash flow. With factoring, you get paid as soon as you turn the invoice over to the factor – which can be as soon as you provide the service or ship the product. You won’t have to wait days, weeks or months to add cash to your bank account.
Since factoring is a sale of your invoices, you aren’t taking on new debt that may or may not have a high interest rate associated with it. You also aren’t stuck worrying when customers will make their payments since the factor can have the money to you quickly, which improves your ability to manage cash flow.
With more certainty about accounts receivable, you can better plan and take advantage of growth opportunities that arise.
Factoring also eliminates the need to conduct collections internally. That frees you up to run the business and protects your relationship with customers – you won’t be the one chasing down payments; the factoring company does it for you.
What services do factoring companies provide?
Factoring companies offer several services around collecting past due payments for business customers. Here are four of the most common services they provide:
Recourse factoring. If the factoring company can’t collect payment on the invoices, the business owner must pay back any money advanced. This may be riskier for the small business, but the service typically has lower fees.
Nonrecourse factoring. If the customer doesn’t pay the invoice, the factoring company is on the hook. That means less risk to you and your business, but it does mean higher fees.
Spot factoring. This service is for businesses that only need to factor a single invoice. Typically, it’s for large invoices you’re having trouble collecting or don’t want to wait months to get paid for.
Whole ledger factoring. With this service, you factor all your invoices, which tends to be cheaper than spot financing. The risk with this type of factoring is that you could face a hefty fee if you terminate your contract before it expires.
How do you terminate a factoring contract?
Like other contracts, you can terminate a factoring contract at the end of the specified term and before the renewal period ends. Every factoring company that we evaluated requires clients to give notice before the renewal date; the time periods vary, however, it can be anywhere from 30 to 90 days. Check the contract to verify how early you need to submit notice.
If you want to cancel before the term ends, there are fees involved. Early cancellation fees vary; again, you will need to check the contract.
How can factoring help your business get through a rough patch?
If your business experiences financial difficulties, factoring invoices can give you access to cash flow – you won’t have to wait for your customers to pay you. That could mean the difference between keeping the lights on or shutting down operations.
Many factoring companies offer collection services, which can be helpful if unpaid invoices are impacting your cash flow. While the factoring service is following up on unpaid invoices, you can focus on bringing in new business.
Factoring may cost you more money than a bank loan, but the requirements are less stringent, which means that even if your business credit score or personal credit score isn’t stellar, you may still qualify for factoring.
What are the advantages of factoring?
You get several main benefits from partnering with a factoring service:
It saves you time. Time is money, and when you’re spending it chasing customer invoices, it means less time to grow your operations. When you use a factoring company, you get some of that time back. Its staff will be the ones doing the legwork to recover the money, not you.
You get instant access to cash. Since the factoring company takes over your accounts receivable, you get quicker – sometimes instant – access to cash. You won’t spend months waiting to collect money from customers.
It doesn’t require collateral. Bank loans require you to put up business or personal collateral. That’s not the case with factoring, since the company is paying you a discount for your accounts receivable.
What are typical costs for factoring?
Factoring companies charge either a variable or fixed rate, depending on your industry. With variable fees, the factoring company typically charges 1% to 3% of the invoice for as long as it goes unpaid. This charge is known as the discounting rate. If the customer pays quickly, the fees are lower. If it takes longer to collect, expect to pay more. For example, a factoring company could charge 1.15% in the first month and then 0.5% every 15 days the invoice isn’t paid.
With a fixed-rate plan, which is common in the trucking industry, the factoring company’s rate stays the same, whether it takes 10 or 60 days to collect.
What do you need to start with invoice factoring?
We recommend that you gather your company information and accounts receivable documents before starting the application process. The information you need to provide varies from one factoring company to the next, but it typically includes your business and personal phone numbers, email address, and details about your business such as your monthly invoicing volume and the sector you operate in.
Most factoring companies also request an accounts receivable aging report that lists your unpaid invoices, a copy of your articles of incorporation, your business bank account information, and your tax ID number. Factors for certain industries may have specific guidelines and additional requirements that you must meet before being approved for invoice factoring.
What is the goal of factoring?
Invoice factoring takes unpaid invoices and turns them into cash so businesses can fund their short-term capital needs. Invoice factoring provides business owners with access to the cash from invoices quickly, helping them bridge the gap as they await payments, which improves their cash flow.
What is a factoring agreement?
A factoring agreement is the financial contract that spells out all the costs of factoring, including upfront expenses, maintenance and termination fees. It also explains the consequences if the business can’t repay the factoring company. A factoring agreement ensures both parties understand their obligations. Factoring agreements are legally binding for both the factoring company and your business.
When should you use factoring?
Invoice factoring costs money, which means you’ll earn less profit on the invoices you turn over to the factoring company. It’s not right for every business, and it’s a decision that shouldn’t be made lightly.
Invoice factoring is best if your customers are businesses rather than individuals. Business clients usually pay 30, 60 or 90 days out, and invoice factoring can give you access to cash while you await payment. These are some other scenarios where it may make sense to use invoice factoring:
- You don’t have the credit to get a loan or use a credit card.
- You have gaps in cash flow due to the seasonality of your business.
- Your business is growing quickly and you need more cash to sustain that growth.
What types of companies and industries can take advantage of factoring for small businesses?
Factoring works best for companies that have outstanding invoices and/or customers who don’t pay their bills on the spot. When shopping for a factoring company, be mindful of the industry each factor serves; some only work with specific industries. Some common industry specialties for factoring companies are trucking and freight, manufacturing, wholesale, business consulting, and medical offices.
Your ability to use factoring also depends on the creditworthiness of the customers you serve. It is uncommon for factoring companies to purchase invoices if the customer is a high risk for nonpayment. Some companies also stay away from businesses that have delinquent accounts, while others will only accept accounts that are up to 45 days past due. The industry average is 60 and 90 days past due.
How does factoring differ from a business loan?
With factoring, you sell your customers’ unpaid invoices to a lender (the factoring company) at a discount in exchange for a lump sum of cash. The factoring company oversees the collection process; it gets paid when it collects the money from your customers, usually in 30 to 90 days. With a business loan, you borrow money at a fixed or variable rate for a predetermined amount of time, with payments due weekly, biweekly or monthly.