What is a Factoring Company?
So, you know freight and you know trucks, but do you know factoring and how to identify and choose the best freight factoring company for your business needs?
You may have heard the term, or may even have employed a factoring company, but do you really know what freight factoring is? Or what qualities to look for in a company that makes it one of the best freight factoring companies for your trucking business? Let’s go over some basics to ensure you’re set up for freight factoring success!
Getting Started: How To Distinguish Top Factoring Companies From the Rest
Factoring is a service whereby a company buys your receivables, in this case, invoices for loads. They buy the load for a discount, get you paid quickly, and then the factor waits to get paid by your customer, which in this case is the broker or shipper. The factoring company makes money on the spread between what they pay you and what they get paid. That’s factoring in a nutshell.
Sounds great, right? It is, or rather it should be great, but that’s not always the case.
There are a lot of details you should be aware of to really know what factoring is, and what exactly you’re getting into. Many people, especially owner-operators, think all factoring is created equal, and shop on rate alone. This is a big mistake, and we’ll discuss this in more detail a bit later.
What to Look For in Contracts, Terms, Conditions, Fees and Services A Factor Provides
The first thing I tell our prospects to look out for are the actual terms of the contract, rate aside. Is there a commitment to the factoring company? If so, for how long? How can you get out of it if you are unhappy? At our company we do not generally have long term contracts.
Service is the key to factoring, especially with transportation companies. Customers often require extensive guidance and attention, a lot of back on forth with paperwork and other administrative matters, and you want a company that does this efficiently, courteously and with fair prices. If you shop on rate, you will often times be left out in the cold on a long term contract that’s nearly impossible to escape, and essentially held hostage in a factoring contract.
Over and above the rate, the value of a factoring company, (to those who understand it), are the additional services it provides. If your factoring company is acting as a complete back-office solution, you are saving financial resources and time that you would otherwise dedicate to employing one or more employees. Activities that top factoring companies do for you, besides financing, are primarily billing, collections and paperwork management, all falling under the category of administration or back office.
While freight factoring is not for everyone, if used wisely as a handy and effective tool, it’s an extremely efficient, holistic and turnkey solution to small and mid-sized transportation companies. Larger fleets also benefit tremendously from freight factoring, but the economics and procedures for large fleets are significantly different, and that’s a whole other topic.
Top Factoring Companies Help Grow Your Business: If An Offer’s Too Good To Be True, Think Twice
Freight Factoring is more of an art than a science. To do it well and protect your interests, (while the factor covers their own), a significant cost is absorbed by the factoring companies, which is how rates are calculated and derived. Don’t be fooled. A gimmick many factoring companies use is offering “rates as low as 1%” - and unfortunately, most owner operators and mid-sized carriers do not read their contract, at all. Yes, it is 1% but you will most likely never pay 1%, and it’s an offer that’s simply used as a marketing tactic to get you in the door.
At Freight Factoring Specialists, we always offer free reviews of all contracts of competitors with no obligation. We don’t like seeing anyone get locked into contracts with potentially harmful terms. We want to see companies grow, not burn out and crash.
Other things to look out for are common hidden fees and fine print in contracts.
Many freight factoring companies charge customers:
ACH (Automatic Clearing House) fees, also known as direct deposit payments fees; Per-invoice processing fees for every invoice factored; Monthly minimums and additional fees for other services.
Freight factoring customers, beware!
We beg you to please read the contract and do not give in to the pressure of salespeople who are almost universally compensated on a commission basis. Look out for yourself first and foremost, and be careful. Our team takes tremendous pride in its transparency, honesty and concern for client needs, but not all factors do.
Unveiling the Myth of Merchant Cash Advances: It Looks Like a Loan & Sounds Like a Loan, So Is It?
While not directly related to the topic of this blog past, I’d like to touch on one more business financing topic that’s extremely important and relevant to you as a business owner, especially in the transportation business. There are a tremendous amount of offers for MCA (Merchant Cash Advance) programs in today’s financing market that are heavily targeted at transportation companies. Sales pitches like, “We can have you funded with $100k by tomorrow at zero interest,” are both common and highly misleading. The wording of such marketing campaigns is very specific, because if you’re charged an interest rate, the so-called advance you get is technically a loan.
But, why would a financing company go out of their way to avoid calling it a loan if that’s truly what it is? Because if it is a loan, then there are maximum interest rates companies are allowed to charge, varying state by state. Calling an MCA a loan can be deemed criminal usury, so it is disguised as a cash advance.
I’ve seen MCA interest rates equivalent to well over 100% per year - yes, you read that correctly! Don’t take the bait and fall into the trap of fast cash; all that glitters really isn’t gold. It will more than likely incur increased damage and debt to you and your business, and may haunt you forever if you default. MCAs work for a very, very small percentage of the business population.
For more insights on MCAs, stay tuned for an upcoming post that’ll go into further depth on the topic on the FFS blog. In the meantime, please say no to MCA offers, unless you truly understand every aspect of what they involve and what you’re getting yourself into. There are no free lunches and no fast tracks to making money.
Final Thoughts on Finding the Best Freight Factor for Your Business
Freight Factoring is a wonderful tool if used properly to grow and run your business efficiently. It is not the cheapest method of financing but offers tremendous value above and beyond financing. Like all things, please read and understand any legal document you sign, and if necessary, engage your attorney. There are some less than reputable companies out there that prey on small owner operators, so please don’t let them.
Interested in more insights and updates on factoring, financing, the transportation industry or all of the above?