How to Calculate Your Cost of Freight Factoring

Every day we talk to carriers who are trying to compare the costs of different freight factoring options. It’s often difficult. That’s because across the freight factoring industry there are many different ways to charge.

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Here’s a simple example: Let’s say Factoring Company A is offering a lower rate than Factoring Company B. However, Factoring Company A will only advance 80% of the invoice, and charges an invoice processing fee. Which one is actually the better deal?

This article will help you compare multiple factoring options. You’ll learn three things:

How to standardize all costs into a total effective rate
How to calculate a total effective rate for an example factoring contract
How Outgo lowers your total effective rate

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How to standardize different types of factoring costs to make a comparison

The true challenge of comparing different freight factoring options is that they aren’t standard. In a single factoring contract you can have discount rates, per-invoice fees, per-year fees and other contract terms. For a complete review of the different types of factoring costs and how they work, check out The Only Article You Need to Understand the Cost of Factoring.

The best way to make an accurate comparison is to calculate a Total Effective Rate. The total effective rate is what you are actually cost for factoring. You can use the concept of a Total Effective Rate to cut through complex offers and quickly compare one factoring offering to another.

Calculating total effective rate is simple:

Total Effective Rate = Total Cost to Factor / Total Amount Factored

To be clear, this should include every cost in your factoring contract, not just the “factoring rate” that many companies advertise. Some carriers make the mistake of focusing on the factoring rate only, and miss the fact that their true cost of factoring is much, much higher.

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How to calculate total effective rate for a hypothetical factoring contract

Now it’s time to look at an example. In this example we’ll look at a hypothetical factoring contract, and a hypothetical carrier that we’ll call ABC Freight. As part of this example, we’ll imagine what a typical month looks like for this carrier.

Here are the terms of the factoring contract:

1.8% factoring (or discount) rate
80% advance rate
$5 invoice processing fee
$5 ACH fee
$100 application fee

Now let’s imagine a typical month for an imaginary company ABC freight.

8 loads at $1,500 each, for a total monthly volume of $12,000
Weekly fund transfers using ACH

First, let’s calculate the total amount factored. The contract only allows an 80% advance rate, so the total amount factored is 80% of $12,000, or $9,600.

Now, what are the costs? Let’s make a simple table that converts every cost into a monthly amount. For the sake of simplicity, we’ll divide the yearly activation fee per month, and assume that there are 4 ACH transfers per month.

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Now it’s time to calculate Total Effective Rate. Remember, that’s Total Cost to Factor/ Total Amount Factored.

In this case that’s $285.75 / $9,600 = 2.98%

All of the sudden thanks to fees and discount rates, that 1.8% factoring rate just jumped to 2.98%!

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How Outgo lowers your total effective rate

Unlike most freight factoring contracts, the more you learn about Outgo the more you can lower your total effective rate. To start, Outgo has:

No advance rates
No application fees
No ACH fees
No invoice processing fees

And, Outgo has even more ways to save. When you wait 30 days to factor, or swipe the Outgo Card* your factoring rate drops to 1%. This means that when you calculate the total effective rate with Outgo, the factoring rate is often lower than you think.

If you want help calculating your Total Effective Rate with Outgo, or with any other freight factoring company, just get in touch by contacting interest@outgo.co.