Loans are often a necessary part of doing business in any industry, and there are plenty of types of credit that companies can lean into including the most obvious traditional loans. In the freight industry, there’s an additional finance option that can facilitate seamless operations while maintaining solid financial footing: freight factoring.
Here, you’ll find some of the key factors that trucking companies should keep in mind when they’re trying to decide whether to use factoring or traditional loans in their freight business.
Understanding the Difference Between Factoring and Traditional Loans
Freight factoring is when a freight company sells their invoices to a third party (the factoring company) and receives payments directly from that third party rather than their customers.
Why companies choose factoring:
- Access to fast cash that the company has already earned
- Improves cash flow despite net 30, 60, or 90 payment terms
- Collections become the factoring company’s responsibility
A traditional loan involves borrowing a lump sum of cash. The borrower then makes payments that include interest and fees.
Why trucking companies might want to avoid a traditional loan:
- Interest rates and fees that keep coming through the life of the loan
- Bad debt reduces borrowing power for future investments
- Loan payments dip into operating budget
Credit Considerations: Factoring VS Traditional Lending
Credit can be tricky to build on both a personal level and as a business, and it’s a major factor trucking companies should look at when they’re considering whether to get a traditional loan or opt for freight factoring to help steady cash flow in their business.
In traditional lending, just like when you’re taking out a loan for personal reasons, the bank is looking at the trucking company’s credit rating and collateral when they’re deciding rates, terms, how much the company can borrow, and even whether they’ll approve a loan application at all.
For well-established or large companies with plenty of collateral, credit rating may be a non-issue. However, for smaller or new trucking companies, credit rating could hinder their chances of getting the loan they need.With freight factoring, rates and terms are set based on the trucking company’s customers’ credit ratings. A freight company whose customers pay their invoices on time and in full reliably may be able to qualify for better terms, regardless of the freight company’s current credit rating.
Timing is Key in Keeping Cash Flowing
One thing that trucking companies should keep in mind when they’re comparing factoring and traditional loans is the time it will take to have money in hand. There’s a substantial difference between how long it takes to get a traditional loan and how long it takes for a factoring company to send funds.
Traditional loans can take a long time. Seeking out the right lender, gathering all the paperwork, getting approval, receiving the actual funds, it all takes time. Getting approval alone can take up to a week. Even if the bank sends the funds immediately, wire transfers can take days. The time it takes to have cash in hand from a traditional loan could make or break a trucking business in some circumstances.Once freight factoring services are established, trucking companies can gain access to their funds almost instantly. With DropPay by Express Freight Finance, funds can now be sent within seconds of dropping off a load, all by managing everything through a mobile app reducing the time in between loads it takes to get paid. DropPay enables businesses to get paid immediately, anytime, anywhere which is a game changer in this industry when carriers are always on the road. Learn more about DropPay here or call 855.DROP.PAY (855.376.7729).
How Does Repayment Work?
How a company repays the loan is one of the biggest differences between factoring and traditional loans.
With a traditional loan, the company will be responsible for making timely payments on the balance of the loan that include interest and potentially additional fees. The terms for these payments are set when the loan is originated, and they typically don’t change throughout the life of the loan.
With freight factoring, repayment occurs automatically when the invoice is paid by the trucking company’s customers. The trucking company isn’t responsible for paying off the factored amount as the factoring company is handling administrative duties, including sending invoices and processing payments from customers.It’s important to note that interest rates paid for traditional business loans often amount to more than factoring fees since the borrower is paying interest over the life of the loan. Freight factoring can be surprisingly affordable.
How Much Money Can You Get Access To?
Traditional loans may be useful when a trucking company for large capital investments that must be made to secure the growth and operations of the freight business. The amount of money a company can borrow through a traditional loan may be severely limited by the current size of the company and its credit rating.
While factoring may not be able to offer a company access to cash that they haven’t earned yet, many factoring companies offer access to other financial services that can help trucking companies achieve the growth and success they’re aiming for.For example, Express Freight Finance offers equipment leasing financial services that can help trucking companies grow their fleet or replace aging equipment. Reach out to us at 877.697.0605 to learn more about leasing and other additional financial services we offer.
Keep Flexibility in Mind
The freight market is constantly changing, and that means that trucking companies need flexibility when it comes to their financial solutions.
Traditional loans aren’t flexible. The terms and conditions are set at the beginning of the loan term. Oftentimes, the only way to improve terms is to take out a loan with better terms to pay off the old loan.
Factoring offers a great deal of flexibility. A freight company can choose to factor only the invoices it makes sense to factor and continue to use traditional invoicing for their other customers. This allows the company to save money on fees when it makes sense.
Conclusion
There are circumstances where a traditional loan might be necessary for a trucking company, but freight factoring is an effective method to keep a trucking company’s financial house to head off many of those circumstances. Freight companies should consider their needs and financial situation when deciding whether a traditional loan or freight factoring is the right path for their business. Learn more about Express Freight Finance’s factoring options here.