How Much Does Freight Factoring Cost?

Freight Factoring

Freight factoring typically charges a fee of between 0.5% and 5% of the purchased invoice’s total value. This will depend on the company’s standard rate, as well as the size of the invoice, as a larger invoice will generally incur a lower percentage fee.

There are a handful of other fees that might come into play when using the service of a freight factoring business, which are discussed below. However, no matter what fees are implemented, freight factoring will never be so expensive that it defeats the purpose of getting an advance payment.

If you’re interested in getting your own freight factoring quotes, try our free quote-finding tool. You’ll be put in touch with freight factoring companies that suit the needs of your business, and can agree on a quote before the transaction even takes place.


How are freight factoring fees calculated?

There are a few factors that come into play when factoring freight invoices. Firstly, and most obviously, is the factoring company’s service fee. Let’s break down the entire freight invoice factoring process into steps to see where costs will come into the equation.

  1. Say your shipping company finished a job, and the invoice sent to your customer was exactly $10,000. Your customer has up to 90 days to pay the invoice, but you’re burning to secure that cash as soon as possible.
  2. You approach a freight factoring company and offer to sell them the invoice for approximately 90% of its value (this percentage is subject to change, but 90% is typically the maximum value)
  3. You’re free to use that money (theoretically $9,000) however you want, as if the customer has paid you themselves
  4. Meanwhile, the factoring company will follow up with the customer, trying to secure payment for the invoice
  5. Once the customer pays the factoring company the full value of the invoice, the company will then give you the rest of the outstanding invoice, minus the fee it charges, which is a percentage of the total invoice value (for example, if the fee was 3%, the company would take $300)

This rate isn’t the same for every business, or even every invoice. For example, a reliable, established business with great credit may be charged a lower fee, while smaller invoices might incur a higher percentage in order to make it worth the factoring company’s time.

There is then a possible further fee, known as the discounting fee. This is usually very small when compared to the overall quantities of money in the equation, but it’s still worth mentioning. This fee may be something small like 0.008% of the advance payment for each day the customer doesn’t pay the invoice (as always, this percentage can vary).

So in our example, if your customer took 30 days to pay, the factoring company would take 0.24% of $9,000, which is $21.60. As you can see, it pays to be realistic about your advance payment, as the less you take initially, the less of a discounting fee you’ll accumulate.

In the end, your business is left with $9,678.40, as you effectively paid the factoring company $321.60 for an advance on the payment. Obviously, you’d have a full $10,000 if you were able to wait until the customer paid you directly, but sometimes a business needs its money as soon as possible. In that case, it may be worth taking the hit to secure the funds.


Are there any additional freight factoring costs?

The answer to this question will typically depend on the company you’re dealing with, but there usually aren’t any hidden or additional costs when setting up freight factoring, as things will be very upfront when you’re signing up for the deal.

Some fees or rules that factoring companies may include are:

  • Advance fees: Sometimes companies will deduct around 1% of the advance payment. For example, in our above scenario, a company may take 1% of the 90% they gave you as an advance, leaving you with 89% (that would be $8,900 of your $10,000 invoice, with the factoring company taking $100).
  • Required reserves/turnover: This is less of a fee, and more of a simple requirement. Many factoring companies won’t service businesses that have under a certain amount of cash reserves or annual turnover.
  • ACH/wire transfer fees: Some companies might charge additional smaller fees if you’re using specific payment methods, like wire transfers or ACH direct deposits. These will often speed up the money transfer process, so it might be worth it in an emergency.
  • Aging fee: Some businesses take the discounting fee one level further. The normal discount fee is based on the number of days it takes for a customer to pay the invoice, but an aging fee can compound this charge as time goes on.

Another thing to be cautious of is whether you’re signing up for a recourse or non-recourse factoring agreement, which are discussed below. These both come with slightly different rules regarding payment.

Like everything else, all these potential fees will vary based on the supplier. Don’t jump onto the first factoring company you come across, as it may come with a bunch of fees that you otherwise wouldn’t need to pay. Take your time and compare quotes by using our free comparison tool today.


The cost of recourse and non-recourse freight factoring

To quickly define these terms, recourse factoring is the most common method of factoring. It means your company will have to buy back an invoice if your customer never ends up paying. By the nature of factoring, this can be a bit of a problem. You’ll likely want to factor an invoice in order to get quick cash that you need for something else. If the factoring company then wants to refund the invoice, you might find yourself in a bit of a financial bind.

On the other hand, non-recourse factoring is a method where the factoring company takes on a lot more risk. If they asked you to buy back the invoice, you wouldn’t be under any obligation to do so. Of course, with this higher risk would likely come a much higher fee at the end of the process, and many factoring companies won’t even offer this option unless you have a well-established prior relationship and great credit.

In an ideal world wherein customers pay their invoices, recourse freight factoring wouldn’t incur any additional costs. However, in the worst case scenario, you might have to buy back the invoice, which isn’t the best for your bottom line, especially if you’ve already spent the money you acquired. But if this doesn’t happen, the only costs you’ll need to worry about will be the ones you agreed on prior to making the deal.

Verdict

Due to the various costs an invoice could incur, as well as the range of percentages a factoring company could use as a fee, we can’t promise you a firm number for the general cost of invoice factoring. However, factoring companies will typically take a range of about 0.5% to 5% of the invoice’s worth.

The higher the invoice’s value, the lower the percentage fee, while small invoices will usually mean a higher percentage. Different companies will impose different rates, so it’s worth using our free quote-finding tool to find the factoring company that offers a rate that suits you.

Frequently asked questions

What is a good freight factoring rate?
Freight factoring rates range from anywhere between 0.5% to 5% of the invoice’s cost. While obviously a lower cost is better, anywhere lower than 3% is generally considered to be a very reasonable rate.
Do you pay interest on freight factoring?
We can’t speak for every single freight factoring company, but typically, the answer is no. Before receiving your advance from a factoring company, you’ll have agreed upon a percentage cut for the company, which it’ll take once the invoice is paid. On very rare occasions, the factoring company might increase the rate a little bit if your customer is taking too long to pay them back, but this wouldn’t come as a surprise, since you’d have agreed on it beforehand.
Is freight factoring considered a loan?
No, it isn’t. The money you’re getting from a factoring company is yours to keep, and you won’t have to worry about making any kind of repayments. Even the fee that comes out of the invoice is a one-time, fixed percentage fee – not an interest-incurring continued payment.
What is a typical freight factoring fee?
Freight factoring rates range from anywhere between 0.5% to 5% of the invoice’s cost. However, 0.5% is very low, typically reserved for invoices of significant size, while 5% fees are usually only implemented on small invoices.
What is freight factoring?
Freight factoring is the act of converting unpaid shipping and freight invoices into liquid cash. By selling the unpaid invoice to a freight factoring company for a cash advance of around 90% of the invoice value, your business can ensure that it has the money needed to make time-sensitive payments.
Duncan Lambden
Duncan Lambden Senior Writer

Duncan (BA in English Textual Studies and Game Design) is an Australian-born writer for Expert Market. His articles focus on ecommerce platforms and business software that allows small businesses to improve their efficiency or reach, with an emphasis on invoice financing and customer relations. He has written for Website Builder Expert and Tech.co, and has been featured in Forbes. In his free time, Duncan loves to deconstruct video games, which means that his loved ones are keenly concerned about the amount of time he spends looking at screens.