What is the Cost of Factoring? 5 Ways to Lower Costs – Matrack Insight
Liquidity is the lifeline of every business. An industry cannot operate in the absence of adequate liquidity. There are many ways to maintain liquidity in your company, like controlling overhead expenses, monitoring debt obligations, eliminating unwanted assets, and sweeping accounts. Invoice financing is a very effective way of keeping the cash flow rolling.
Invoice discounting and factoring are the options available to avail a foreseeable and improved cash flow.
While invoice discounting is a loan secured against your outstanding invoices, invoice factoring is the outright selling of unpaid invoices. It is a significant distinction since it gives factoring businesses credit control, allowing them to interact directly with clients.
We will explore Invoice or cost factoring in this article and suggest ways to lower your costs.
- What is Cost Factoring?
- Types Of Factoring Service
- Recourse Factoring
- Non-recourse Factoring
- Benefits of Truck Factoring
- Working Capital
- Increases Cash Flow And Offers Chances To Save Money
- Focus On Freight Brokers’ Credit
- Quick Solution
- Determining Cost Factoring
- Customer Base
- Size Of Invoice
- Customer Credit
- Settling of Payments
- Stability Of Business
- Additional Costs
- How To Calculate Factoring Costs?
- Cost Of Factoring Charges
- Five Ways To Lower Cost
- Matrack Truck Factoring
What is Cost Factoring?
Cost factoring is also known as freight factoring in the trucking industry. The freight industry operates by picking up and delivering goods from one location to another and getting paid by the shipper or broker. Your profit is the total of your payment, less the expenses incurred, in delivering the cargo.
However, it is significant to understand the difference between the time you get the invoice and get paid. There is a considerable lag of greater than 45 days till your payment is realized.
The trucking company can improve its cash flow by offering its accounts receivable to a third-party funding source at a discount. It will ensure that your weekly and monthly expenses are met without taking a bank overdraft, using your credit card, or out-of-pocket expenses.
Types Of Factoring Service
In recourse factoring, if your client fails to pay the invoice that includes the cash advance and any additional fees, you will be liable for the same. You need not make payment in cash; instead, you may agree to have the outstanding invoice replaced with a new one of acceptable value or request that the factoring company deduct reserves.
In non-recourse factoring, you need not pay back the invoice amount if an invoice is passed late and the client fails to pay for a legitimate reason like bankruptcy. The only qualified grounds in non-recourse factoring are closure or bankruptcy, which must happen during the factoring period, i.e., typically the first 90 days after purchasing the invoice.
Benefits of Truck Factoring
Truck factoring companies offer the benefit of acquiring working capital for your business, which otherwise would have been difficult to obtain from traditional lending companies.
The ability of the customers to make on-time payments determines whether the factoring arrangement will succeed rather than the reputation of the business owner.
Increases Cash Flow And Offers Chances To Save Money
Truck factoring firms are aware of the value of liquidity in day-to-day operations. Therefore, in addition to improving cash flow, they provide incentives like fuel discount cards to help trucking companies cover operating costs. They can use fuel cards, which may also come with bonuses like repair discounts, fuel advances, and further fuel savings, to channel some of the money.
Focus On Freight Brokers’ Credit
The advantage of this financial arrangement is that the focus is on the customer’s creditworthiness instead of the freight business. There is no stress about possessing excellent credit scores or orderly business financial statements. It helps the trucking company immensely in times of financial difficulties as they get immediate access to funds. It is something that they would never obtain through traditional finance.
In a business, you can never predict a financial emergency, and working capital is hard to obtain from any finance source. Freight factoring offers speedy solutions because the customary approval and payment timeframes are incredibly short.
Determining Cost Factoring
There are many costs associated with invoice financing, just like any other business lending service. Several factors, such as the following, influence cost factoring rates:
For the variety of businesses seeking invoice financing, factoring firms have successfully been able to handle invoices and develop rate offers by following industry standards.
Transportation has lower risks than industries like construction or healthcare. Partnering with the right business specializing in freight factoring will result in beneficial prices.
The volume of business is another factor determining cost factoring. It depends on how much you will be factoring each month.
Generally, your rate decreases as you factor in more bills. Tiered fee plans are being offered by some factoring companies, meaning as your volume increases, your charges will fall.
Cost factoring companies try to assess the risk of investing in your company; this is arguably a crucial step. They want to know if you are dealing with a single client, many clients, or even several broker load boards. They consider it dangerous if you only work with one customer.
Size Of Invoice
Your invoice value may also affect the cost of cost factoring. A factoring company processes a minor invoice in the same amount of time as a large one. The work required to collect a $100 invoice is the same as that of a $1,000 invoice. Lower fees result from higher invoice amounts.
Brokers play a crucial role in cost factoring, as freight factoring firms consider their score seriously. You will receive a better rate if the brokers have good credit ratings and pay their obligations on time. In contrast, you are likely to be charged more for the lower creditworthiness of your customers.
It is the objective of every cost factoring company to mitigate their risks as much as possible. The factoring organization will evaluate the standard of your clientele and the variety of your portfolio. Higher risks for them will result in higher rates.
Settling of Payments
The cost of factoring relies on the turnaround time for payments. Customer discounts and broker payments are linked. If brokers pay on time, factoring companies face fewer risks. Your rate may be affected if brokers pay their bills later than the industry standard or if they let some payments go past the schedule. Cost factoring businesses can impose additional costs for unpaid invoices that continue past the agreed-upon time frames.
Stability Of Business
The valuation of your company may have an impact on the cost of factoring invoices. Newer trucking businesses may initially pay higher rates regardless of whether you are an owner-operator or have a fleet of trucks.
Your agreement includes these complex expenses. Review all additional costs in any factoring agreement carefully because they can pile up.
Additional charges are integrated into the factoring rate or imposed as an additional fee on top of your rate by some freight factoring companies. Application fees, onboarding fees, invoice processing fees, ACH or wire transfer fees, same-day payment fees, monthly maintenance fees, fuel advance fees, and monthly minimums are additional charges examples.
How To Calculate Factoring Costs?
Let’s use an example to illustrate the point. Suppose the factoring company’s terms are 1.5% for 30 days and an 85% advance on your bills. The factor will transfer $85,000 into your account each month for a $100,000 invoice value. The factoring company will pay you the remaining $13,500 after deducting their charge of $1,500, estimated at 1.5% after 30 days of receiving the money.
Cost Of Factoring Charges
The typical cost of factoring bills ranges from 1% to 5%. Note that the factoring rate is only a portion of what you would pay overall.
Invoice Factoring Rates
- Flat Rates
The most typical rates in the trucking sector are flat rates. No matter how long the invoice remains unpaid, you pay one time when the invoice is processed.
- Tiered Or Variable Rates
A tiered or variable rate method is a provision given by certain factoring companies for adjusting fees depending on the time taken to make the payment. For instance, they might add a 0.50% factoring fee every 10 or 2 weeks after the first 30 days at a rate of 2%.
When you submit an invoice with this rate type, you get compensated as a percentage of the total. You receive the leftover sum once the broker settles the invoice, less the factoring, and other charges.
Five Ways To Lower Cost
Lowering costs is the objective of every business, thereby increasing savings & maximize profits. Running daily operations requires steady cash flow. There are occasions when a fleet is strapped for cash. It is when they turn to factor their accounts receivable to tide over the situation.
The factoring company acts as a facilitator for providing this service and charges a fee for the same. The business will weigh the benefits against the cost before availing of account receivable financing to achieve its objective of better cash flows.
The following strategies can help a company continue to increase cash flow while lowering or offsetting the cost of factoring:
- Rebates For Early Payments
An early payment discount is 2/10 net 30. It means the trade credit is offered to the customer.
If the payment is completed within ten days, the vendor offers a 2% discount; otherwise, the amount is due in the customary 30 days. Savings of $2 for every $100 seems negligible but adds up in the long run. Additionally, it will assist in reducing the discount cost that the factoring businesses charge the business.
Utilizing early payment discounts provided by vendors and service providers is the first way a company can lower or offset the cost of factoring bills.
- Bulk Buying
In bulk buying, there is a reduction in a portion of the cost of each item. In other words, you pay less or receive more for your money.
Delivery fees and tax on each product are regular costs associated with lesser volumes. You avoid these modest but significant costs when you buy in bulk.
It can be applied to lower or offset the cost of factoring invoices by bargaining with the suppliers when making bulk goods purchases. It makes sense to order in bulk if you can obtain 500 units for $1 each or 1,000 units for $0.75 each. It can ultimately result in savings of at least 25%.
- Focus On Paying Clients
Having a promptly paying client is a boon for any business. Time is money and vice-versa. The cost of factoring is directly related to how long it takes for a customer to pay an invoice.
A business might lower the cost of factoring by focusing on invoices from clients that often pay promptly.
- Delay Invoice Submission
Another beneficial technique to lower costs is to let your invoices age for 10 to 20 days before submitting them for a cash advance to the factoring provider. By aging the invoice for 15 days before factoring, even customers who generally pay in 45 days can become 30-day customers.
- Increase Growth & Profit
It may make economic sense to consider Invoice financing if a company can boost profits by a higher margin than the cost of factoring. A rise in working capital can supply the money needed to accept and complete a new order.
Since many overhead expenses are fixed and might not rise gradually with the cost of goods, it can also help to boost profit margins.
Matrack Truck Factoring
Matrack Truck Factoring Solution is a well-known and reputed name in truck factoring in the United States. With products like Dashcams, ELD solutions, Fuel-card, Fleet GPS tracking, Asset & trailer GPS tracking, Truck factoring, and ATV & Boat tracking devices, Matrack is a one-stop shop for all tracking requirements.
The following are features of the Matrack Truck Factoring Solution:
No Credit Check
Unlike other service providers, Matrack doesn’t require your Social Security Number if you have a corporation.
Same Day Funding
Matrack provides 100% funding within the same day.
The truck factoring solution is fully non-recourse. Matrack assures not to come after you for any reason.
Free Matrack Telematics
Signing up with Matrack Payments entails you Matrack Telematics comprising ELD & Dashcam for free.
Very Competitive Rates
Matrack truck factoring fee is 2.5% or less.
Matrack Fuel Card
Additionally, the Matrack payment solutions work with the Matrack fuel card solutions. Some other benefits include:
- You can get the cheapest gas in any location. You can click on the gas station icon on the platform to find gas stations with respective gas prices near you.
- Save on an average of 50 cents to a dollar per gallon. Matrack brings these savings by routing you to the closest cost-effective gas station or truck stop.
- With fuel management controls, set limits on transactions and monitor expenses in real-time. View those fuel charges matched with GPS location stamps on your account.
- Matrack fuel cards are accepted in over 14,000 locations.
- The fuel finder app helps you search for fuel when in need.
An effective and well-liked method of cost factoring is invoice financing. It works well for businesses that need to enhance cash flow immediately. Note that high turnover and high-value invoices result in reduced fees. As you must have learned by now about the different parameters on which service providers will assess your company. Being diligent about lowering costs will help your business grow and reach greater heights.