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The Only Article You Need to Understand The Cost of Factoring
We talk to carriers every day that want to understand how to compare prices for different factoring options.
While this should be simple, it often isn’t. That’s because every freight factoring company charges differently, and many have hidden fees to conceal their true cost.
We believe carriers should have complete transparency about their rates and fees. That’s why we reviewed dozens of factoring contracts to give you The Only Article You Need to Understand The Cost of Factoring.
By the end of this article you will you know the following:
- The basics of factoring rates
- Common fees
- How recourse agreements can cost you more
Plus, how Outgo helps you save with a clear, transparent pricing structure.
The Basics of Factoring Rates
Discount rate or Factoring rate
This is the number that most carriers focus on when considering freight factoring. When a freight factor buys your invoice, they typically buy it at 2-5% discount to its value. For example, if your invoice is worth $1,000 and you have a 3% factoring rate, you will receive $970. In other words you’ve paid $30 to factor that invoice.
Did you know? Outgo offers rates as low as 1%!
Advance rate
Many freight factoring companies will let you access a part of an invoice early, typically between 75-90%. For example, if you have an invoice worth $1,000, a discount rate of 3%, and an advance rate of 80%, you will only get $800 until the broker pays your invoice. But here’s the tricky part: You’ll still pay 3% of your $1000 invoice for early funds access, but you only get $800 in your account early. If you do the math, that’s like paying a higher effective rate (3.75% in this case!)
Did you know? Outgo has no advance rates: you can factor 100% of approved invoices.
Common Types of Factoring Fees
Transfer fees
Most factoring companies charge fees to move your money. The most common ways to move money are through ACH and wire transfers. These fees can run up to $10 per transfer for ACH, or up to $30 for each wire transfer.
Did you know? Outgo has free ACH transfers and and in fact you can save money on factoring by spending with the Outgo Card*.
Invoice processing fees
When a factoring company buys your invoice, it takes on the responsibility of sending an invoice to the broker and collecting on it. Some factors charge carriers extra for this work. Invoice processing fees can go as high as $5 an invoice, which quickly adds up if you are running a large number of loads.
Did you know? Outgo does not charge an invoice processing fee.
Check cashing fees
When a broker pays your freight factoring company, they may pay by check. Some freight factoring companies charge carriers extra for processing and cashing checks. Check cashing fees can go as high as $15. As a carrier, this can be frustrating since you can’t control how your broker pays.
Did you know? Outgo has no check cashing fees.
Application fees
When you start working with a factoring company they may run a credit report or other screenings. Some freight factoring companies charge carriers extra for this. Onboarding fees are often as high as $100.
Did you know? Outgo has no application fees.
Misdirected payment fees
When you start working with a freight factoring company they will inform your brokers to direct payment to pay them. Sometimes, the broker will mistakenly pay you. In this case, you are obligated to forward the payment to the freight factoring company. Many freight factoring companies will charge you a fee if this happens, even if it happens mistakenly.
Did you know? Outgo gives you time to correct misdirected payments before assessing a fee.
How Recourse Agreements Cost You More
Broker recourse: One very common type of freight factoring agreement is called a recourse agreement. In a recourse agreement a freight factoring company can collect money from you if your broker cannot pay. This can happen in cases where the broker goes bankrupt. According to the International Factoring Association, factoring companies lose between .2% and .5% of total invoice value due to insolvency. What does this mean for you? If you have a recourse agreement, you may be on the hook for those losses! Did you know? Outgo is non-recourse and does not collect from you if a broker you work with becomes insolvent or cannot pay.
At the end of the day...
Whether you’re currently with a factoring company or shopping around for one, it’s important to know exactly how much factoring costs so you can manage your cash flow. Always read your factoring agreement carefully and keep an eye out for those extra fees - they add up quickly.
Outgo believes in transparency - view our rates & fees here. Or give us a call at 1-888-308-8810 if you have questions about your cost of factoring.
*Outgo is a financial technology company and is not a bank. Banking services are provided by Blue Ridge Bank, N.A., Member FDIC. Funds in your Outgo Account are FDIC insured up to $250,000 through Blue Ridge Bank, N.A. Member FDIC. The Outgo Business Visa ® Debit Card is issued by Blue Ridge Bank, N.A. pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa Debit cards are accepted.