Freight factoring has become one of the most critical tools and resources for any trucking company looking in search of success. It’s a straightforward process, but there are several different types of factoring you need to consider — including tiered factoring rates and flat factoring rates.
Before we get into the difference between those two, let’s first go over what freight factoring is — for those that might be new to the subject or new to the trucking industry.
Freight factoring is when a third-party company (the factor) buys your open invoices, giving you an advance on the amount owed by your client. This helps your trucking company avoid the long waiting periods before a client pays an invoice, which is generally 30-60 days.
With freight factoring, you can ensure you don’t run into any cash flow problems, and it can give you the confidence needed to continue working day-in and day-out. Freight factoring companies also offer a wide range of additional benefits like fuel cards and discounts on truck maintenance.
What Are Tiered Factoring Rates?
Now that we have a better idea of what freight factoring is let’s discuss two of the major types of freight factoring — starting with tiered factoring rates.
Tiered factoring rates refer won’t always be constant and will depend on how long it takes the factor to receive payment from your client. The longer your client takes to pay, the larger the factoring fee will be.
For example, let’s say you’re working with a factor that sends you an advance worth 90%. The invoice in question is worth $1,000, meaning you receive a $900 invoice. The factoring fee for tiered factoring rates might be 4% per 30 days.
If the client pays in 60 days, the factor will take 8%, and you’ll receive the remaining 2%.
What Are Flat Factoring Rates?
On the other hand, flat factoring rates are a little easier to maintain. Instead of the factor fee changing, it will remain a constant fee. It won’t matter if the client pays after 10 days, 30 days, or 60 days.
Using the example from above, let’s say the factoring fee is 7%, and the advance is 85%. You’ll receive $850 up-front (usually within 24 hours) and another 8% when the invoice is paid. The factor will keep the 7%.
Which Type of Factoring Is Right for You?
If you’re interested in freight factoring for your trucking company — which you should be — you might be wondering which one is better. Several things will determine this.
First, you should consider how your business typically operates. Ask yourself if it would be easier to plan ahead with flat factoring rates or if you’d be willing to potentially save money on some of the invoices your factor accepts.
Secondly, you’ll want to consider how quickly your clients are with paying off invoices. If they generally take a while to pay off, a flat factoring rate might be preferred. Of course, you’ll know your clients better than anyone.
To take a look at some of the most prominent freight factoring companies ready to serve you, visit our website today. We can help match you with the right factor for your trucking company.
“The Difference Between Tiered and Flat Factoring Rates.” The Difference Between Tiered and Flat Factoring Rates | RTS Financial, www.rtsinc.com/articles/difference-between-tiered-and-flat-factoring-rates.
Landrum, John. “What to Consider When Choosing the Best Factoring Company.” OTR Capital, OTR Capital, 11 July 2019, otrcapital.com/best-factoring-company/.