Truck factoring (or “freight factoring”) can be an amazing way for truck companies to receive immediate cash. But, if you aren’t careful about what you sign and which factoring company you work with, you might lose money.
According to https://simplexgroup.net/factoring/, you should know various fees and costs associated with factoring. Here is what you should know about the costs involved in trucking factoring.
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Factoring Fee
The primary cost of factoring is the factoring fee. It is usually charged as a percentage of the total value of your submitted invoice. However, certain factors can affect the factoring fee, such as:
- The creditworthiness of your customers
- The volume of invoices factored
- The industry
- The specific terms of your agreement with the factoring company
Although factoring fees usually range from 1% to 5% of the invoice value, they can be higher or lower depending on the above factors or other issues.
For example, in some agreements, if your customers fail to pay the full amount of the invoice on time, the factoring fee may rise by 1%. Yet, this is not always the case. It all depends on the agreement signed with the factoring company.
The Advance Rate
You cannot sell your trucking company’s invoice and expect to receive the full amount. Factoring companies will only offer you an advance rate upfront. For example, they may offer you 80% or 95% of the invoice’s value.
The remaining percentage will remain as a reserve by the factoring company until your customers pay the invoice fully. Once they do, the factoring company will release the remaining funds minus all the applicable fees and deductions.
The Reserve Holdback
Another important aspect you should know regarding the costs involved in trucking factoring is the reserve holdback.
A factoring company will retain this portion of the invoice value as a safeguard against potential payment disputes, chargebacks, or customer defaults.
When the customers pay the invoice in full, the reserve will be released to you minus any applicable fees.
The reserve amount that is temporarily withheld can range from 10% to 20% or more. It all depends on the specific terms of your agreement with the factoring company and the perceived risk associated with your customers.
Additional Fees or Termination/Cancelation Fees
Not all trucking factoring companies work the same. They have different fees that may apply to your situation. For example, some factoring companies might charge credit checks when they verify your customers.
Other applicable fees might be same-day funding fees, card programs, or other value-added services.
One good example is the ACH transfer fee, which is often present in such transactions. All of these fees aren’t necessarily present in every factoring company’s policies. They can vary, and the specific services provided can differ from one company to another.
Yet, before working with a factoring company, you should carefully read the agreement and assess all the fees.
This is especially important concerning termination or cancelation fees. They are also outlined in the factoring agreement. In most situations, if you end a factoring relationship before the agreed-upon term, your company might need to pay an additional fee or penalties.
Whether you’re running a freight business or are a solo operator making money with your box truck, you should now understand factoring better to avoid being hoodwinked.
