Factoring versus Lending. Why is factoring different from a loan or a bank line.

There is a huge difference between lending, bank loans, lines of credit, bank relationships and the core concept of factoring. Yes, factoring is a form of financing but it’s very clear according to the Uniform Commercial Code that factoring is the buying and selling of accounts receivables at a discounted rate. The relationship of the parties is that of a purchaser and a seller rather than a lender and a borrower.

When you work with a bank, you’re usually borrowing money from them at some sort of annual percentage rate (APR) much like you’re getting charged an interest rate on the outstanding balance you have with any personal credit cards. Usually these rates can be as low as Prime or LIBOR based rates ranging from 3-7% with basis point additions, all the way up to 18-24% APRs like you see when utilizing a credit card. In the grand scheme of financing, banks are the way to go. If you can finance your business through a larger banking institution then try to get the cheapest rate you can.

Factoring on the other hand is a little more expensive and not necessarily for everyone. The rates you’re going to pay for factoring range anywhere from 1.5-6% for each transaction you’re selling to the factoring company. Let’s be clear though that this is a one time fee and not an annual percentage rate. You’re not in a lending relationship so you’re selling a transaction 1 invoice at a time.

Let’s try to compare the two side by side so we can see the difference in cost of capital from each service.

Let’s take a trucking company who does $20,000 in monthly revenue. It’s probably going to take approximately 45 days to get paid on their invoices so if they were to utilize a credit card with a $30,000 credit limit and a 24% APR and had it maxed out throughout the year and constantly paying it down and utilizing their credit limit, their cost of funds would be approximately $7200 per year to utilize that credit card and to use the banks money. Given that they’re doing $20,000 per month and have an annual revenue of $240,000 for the year, only paying $7200 is not bad.

Let’s take that same example and apply it to a trucking company with a factoring relationship. The trucking company submits $20,000 per month for factoring at an average rate of 4%. Depending on the relationship with the factor, sometimes it’ll be lower or higher but let’s just use a 4% factoring rate as an example. Each month, that trucking company pays $800 for factoring services. Multiply that by 12 and now they’re paying $9600 for the entire year.

Clearly, the bank relationship is a far better deal in terms of cost of capital, but there are other factors we’re missing here that are important to point out. Yes, you’re going to pay an additional $1400 to the factoring company than the banks, but with the factoring company, you’re getting a number of services that you might not be getting with the traditional lender as laid out in the above bank relationship.

With the factoring company, you’re getting free credit checks, invoicing, collections, AR Aging monitoring, and many other services that the bank won’t be providing you above. Being on the road all the time, you may have to hire an administrative assistant to handle all your billing and make sure you’re collecting on your invoices. The additional $1400 you’re going to pay for your factoring service is, by far, a better bang for your buck considering all the other services you’re getting.

What it really comes down to is having a partner who understands your space and can provide a consultative service rather than just working capital. OperFi representatives understand the space and have a vested interest on growing your trucking company on a much deeper level than any bank would. Yes, there are cheaper capital resources out there but ultimately, it’s important to partner with a trucking factoring company who can provide that administrative support to help you scale so that you can focus on your core competencies and not have to worry about the small details.