factoring rate

What is a “Good” Factoring Rate?

As a business owner, you always want to make sure you’re getting the best deal possible on everything you invest in. Factoring is no exception. But how do you know if you’re getting a good factoring rate?

The answer is more complicated than a simple percentage. Instead, you need to look at the total cost of the service compared to the value the service provides. Here are three important aspects to keep in mind:

  • Total cost, including the factoring rate and fees
  • Terms and conditions
  • Level of service

Understanding the total cost of factoring

The most obvious part of the cost is the factoring rate. This is the percentage of your invoices the factoring company charges to send your funds. 

For example, Bobtail’s factoring rate for single-truck operations is 3.25%. That means that for every $1,000 the business receives $967.50. When we charge your customer the full $1,000, we make $32.50. 

With Bobtail, the factoring rate is the full cost of the service. The only other fee we charge is for a wire transfer, but this is only needed if you have an urgent need for cash. ACH transfers are free with Bobtail and customers can expect to receive funds the same or the next business day, depending on the time of day the invoice is uploaded.

Unfortunately, most other factoring companies advertise low rates and then charge other fees on top to make up the difference. Here are some things other factoring companies charge additional fees for:

  • Individual invoices
  • ACH transfers
  • Monthly account maintenance
  • Invoice aging reports
  • Customer service requests

Let’s take another look at another example. Say you’re submitting an invoice for $1,200. 

We’ll compare Bobtail with another factoring company promising a 2.5% rate.

BobtailFactoring Company X
Rate: 3.25%Rate: 2.5%
No additional fees.Additional fees:– ACH transfer fee: $15.00– Invoice fee: $4.00
Total cost of factoring a $1,200-invoice$39.00Total cost of factoring a $1,200-invoice$49.00

As you can see, the extra fees Factoring Company X charges make the service more expensive, despite the lower rate.

Hidden Terms and Conditions

Another way other factoring companies earn more money is by adding conditions to the rate such as minimum volume requirements or bundles with other services.

For example, a company may offer you a 2.5% rate, but to keep the rate at 2.5%, you must factor at least $30,000 per month. If you factor just one dollar under that minimum, you could be charged an additional fee or a higher factoring rate. 

In other cases, a factoring company may tie your rate to the use of a particular fuel card. They could sell you at a 2.5% rate, but if you sign the factoring contract and later find that you don’t qualify for their fuel card, now you’re paying 3.5 or 4% for factoring.

Here at Bobtail, we have a simpler approach: you sign a 30-day agreement to factor invoices at a simple, low rate. There are no hidden fees, minimums, or bundles to worry about. 

The True Value of a Factoring Service

Many carriers are hyper-focused on the cost of the service. They want to get the lowest price possible. While it’s important to control your costs, don’t confuse the lowest price with the best value. You wouldn’t buy a truck just because it’s the cheapest one on the lot, right? It’s cheap for a reason.

The same goes for factoring services, or any other business service, for that matter.

Most carriers sign up for a factoring service to help with cash flow. Brokers and shippers take too long to pay their invoices and you need to cover big expenses like fuel, truck payments, and insurance. Of course, this is an important aspect of the service.

But if all a factoring company is doing is fronting you the money on invoices, what happens if a broker refuses to pay or disappears?

Small carriers often don’t have the time or resources to follow up on every invoice with every customer. There’s an infinite number of things that can go wrong when collecting payment: claims on the freight, broker goes bankrupt, short payments, double-brokering, and the list goes on. 

At Bobtail, we work hard to get carriers paid in complicated collections situations. We’ve helped our customers collect from brokers’ surety bonds and shippers directly through collections agencies. We’ve set up payment plans in cases where collecting from the carrier’s customer is impossible. To put it simply: we are in your corner.

Other factoring companies may not be so helpful. We’ve heard from many carriers that their previous factor took no responsibility or initiative to collect on invoices. Instead, when the payment term on an invoice is up, they simply issue a chargeback and expect the carrier to do the heavy lifting of following up with the broker.

If you want a factoring service that actually supports your business, sign up here to get all your questions answered, or give us a call at btn sms sfdclogo410-204-2084.