Also, your eligibility is dependent on your customer base. However, the fees taken out for factoring are often high.
Most companies that choose invoice discounting have been well-established for several years.įreight factoring allows you to collect cash for your invoice and avoid loans altogether. Depending on how long you’ve been in business, you may not be ready to put up an asset as collateral.Īlso, the discounting company may have an annual or monthly fee on top of the percentage rate being charged. You may be locked into your original percentage rate for a long period, even after your credit improves.Īs with many lenders, personal guarantees could be required to secure the loan. Some discounting companies require a minimum contract length. However, the more your business grows, the more funding you can access. If it is less than favorable, the rates you are charged will likely be on the higher side. It is a riskier option than freight factoring, where the third-party company purchased the invoice outright.īecause you’re receiving a loan, your credit history will be checked. Invoice discounting is basically a small business loan that must always be repaid. You may be thinking the two are pretty similar, so what is the difference between factoring and invoice discounting? Let’s look at some of the differences to help you make an informed decision.
Comparing Factoring & Invoice Discounting The invoice discounting company pays you the remaining $2,500 minus their fee, which is usually between 1% and 3%. However, the customer believes they are making the payment directly to you. The agreement is for 75% of the invoiced amount, so you’ll receive a $7,500 advance.Īfter a few weeks, the customer makes their payment to an account controlled by the lender. Next, you upload the invoice to the online account you have with the lending company. The discounting company will take a small percentage.įor example, let’s say you invoice a customer for $10,000 for a shipment you’ve completed.
#Cost of invoice factoring full#
Once you collect invoices from your customers, you’ll let the invoice discounting company know, and they’ll lend you an amount based on the full value of the invoices. So, how does invoice discounting work? Invoice discounting is when you’re loaned a percentage of the dollar amount listed on your accounts receivable ledger. Doing so will help you identify bad payers and improve your ability to collect payments. The factoring company wants to know how long it takes your clients to repay their debts.
With freight factoring, the credit history of your customers is reviewed instead. One of the great aspects of factoring is that it doesn’t involve a business credit check.Īpplying for a bank loan is a lengthy process that requires you to submit a ton of paperwork as they dive into your company’s financial history. Fees vary depending on the company but typically remain in the 1% to 5% range.įactoring is an excellent way to keep your company’s cash flow healthy without needing a bank loan. After doing so, they’ll forward you the money minus the contracted fee. The factoring company follows up with the client and collects the full invoiced amount. You won’t have to wait 30 days or more to receive the cash from that delivered shipment. After the delivery, you’d send the invoice to the factoring company, which then pays you an agreed-upon percentage of the full amount within 24 hours. The factoring company then assumes the responsibility of collecting the payment from the customer.įor example, suppose you deliver a load to one of your clients. But what exactly is factoring, and why would it benefit your business?įactoring allows you to sell unpaid invoices to a company that pays you between 80% and 90% of the amount billed.
Finding a freight factoring company is considered a necessity by many trucking companies for several reasons.
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