Over the past several years, invoice factoring has become a popular cash flow solution, particularly for trucking companies. Invoice factoring allows customers, such as trucking companies, to receive payouts on their accounts receivables quicker than would traditionally be available. While the concept and process of invoice factoring might be easy to understand, figuring out exactly how much invoice factoring will cost is not as straightforward.
The cost of truck/invoice factoring will vary depending on the company that you choose. Typically, truck factoring rates fall between 1% and 5% of the invoice amount. However, there are a variety of additional factors that may influence your truck factoring rates, such as the creditworthiness of your customers, the credit history of your business, and the volume of invoices you’ll submit.
Total Cost of a Factoring Agreement
The total cost of a factoring agreement includes both the factoring rate and additional fees. To fully understand the total cost of a factoring agreement you need to understand how the factoring rate and additional fees are calculated.
Factoring Rate
The truck factoring rate is the percentage of the invoice that the factoring company keeps, in exchange for advancing the funds owed under the invoice to the trucking company. All factoring companies use the same four factors to determine the factoring rate they charge:
1. risk
2. volume
3. time
4. advance rate
Risk and volume are the two factors most heavily considered in determining a factoring rate. When assessing these factors, the factoring company takes several considerations into account. For example, the factoring company will consider the industry and type of business involved in the invoice. This is because some industries and businesses are inherently riskier, which has an impact on the likelihood of the invoice being paid.
The creditworthiness of the trucking company’s customers will also have an impact. Because invoice factoring shifts the creditor of an invoice from the trucking company to the factoring company, the factoring companies are more concerned about your clients’ credit history than yours. Thus, the more creditworthy your clients are the more likely you are to receive a lower factoring rate.
Additionally, volume impacts your factoring rate because the more invoices you factor with a company the more likely they are to give you a preferential factoring rate to help you maintain your business.
Time impacts your factoring rate because the types of factoring rates are based on time frames. For example, factoring agreements that have a flat rate charge a flat percentage for every invoice. You will pay that flat-rate upfront and then you don’t pay any additional amount for as long as the invoice stays open.
Let’s contrast flat rates to variable rates. In a factoring agreement that features a variable rate, the factoring company will typically take a percentage of the invoice for as long as it goes unpaid. Under variable factoring rates, the percentage of the invoice the factoring company takes will generally increase with set timeframes (for example, the factoring rate may be 2% if the invoice is paid within 1-30 days but 4% if paid within 31-45 days). Other variable rates may increase each day the invoice goes unpaid. The advantage to variable rates is that you may end up paying less if your client promptly pays the invoice.
The final factor which is considered when calculating a factoring rate is the advance rate. This is the percentage of the invoice which you are seeking to factor in. Typically, advance rates range from 75% to 100% of the invoice. The greater percentage of the invoice you wish to factor, the greater your factoring rate is likely to be.
Factoring Fees
In addition to the factoring rate charge, there are likely to be additional fees added to any factoring agreement which impact the total amount a factoring agreement costs. Each factoring company and factoring agreement is different; therefore, it is important that you fully read the factoring agreement and discuss the agreement with the factoring company to fully understand any additional fees before entering into an agreement.
Some types of fees that are typically charged include a documentation fee. This is a one-time fee charged upfront to cover due diligence and legal processing. Typically, there are also utilized fees that cover tasks such as invoice processing and the transfer of money. Invoice factoring agreements are either recourse or nonrecourse.
In nonrecourse agreements, you are not liable for any unpaid invoices. However, nonrecourse agreements will generally include a fee to cover credit protection to provide full liability protection against unpaid invoices. Additional fees typically charged include carrier payments, buyout fees, and early termination fees.
It is important for you to fully understand all associated rates and fees. If you don’t understand how factoring rates are calculated or what fees are associated with a factoring agreement you run the risk of accidentally paying more than expected for a truck factoring agreement. It is essential that you fully read each factoring agreement and discuss the agreement with the factoring company before signing any documents.
It is okay to ask for clarity on any rates or fees you do not fully understand. The better you understand a factoring agreement the more prepared you will be and the more you will be able to fully take advantage of the factoring agreement.
Invoice factoring offers businesses, especially trucking companies, many benefits that make the agreements worth it. The advance of funds that factoring provides can help a new business get started or an already established business to grow. Additionally, many factoring companies offer benefits to help trucking companies save money.
For example, factoring companies often offer gas card programs that provide discounts at gas stations throughout the country. These are only a few examples of the benefits that make truck factoring highly beneficial for companies.
Ask Advanced Commercial Capital About Truck Factoring Rates Today!
Advanced Commercial Capital can help your trucking company succeed in ways you never thought were possible.
Talk with our team to learn more about how truck factoring rates work by giving us a call at 855.465.4655 or reaching out via our online contact form.
We look forward to offering you the easiest and smartest way to factor your freight bills and get the cash you need, without any surprises.