Without a regular and constant cash flow, no business can keep their doors open for too long. Each business in just about every industry relies on the money accrued from selling their services and products. The same applies to the freight industry.
Without income from sales, a freight company would find themselves unable to pay office rent, hire drivers, buy new trucks, or maintain the trucks they already have. This is why a steady cash flow is critical to the development and growth of all freight businesses.
However, the situation can become a bit tricky when a freight business allows clients the opportunity to wait for weeks or even months before paying. This sort of scenario usually leaves freight companies with very limited resources to work with.
Ultimately, businesses will fail to deliver goods on time, the company will experience stagnant or slowed growth, and might even lose valued and experienced drivers if they fail to pay them.
Waiting for late payments from clients can really slow down operations for a business and reduce its chances of survival in a market that seems to get harsher and more competitive by the day.
As a solution, some freight companies opt to go with truck factoring.
What Is Truck Factoring
A lot of freight and trucking companies today use factoring to meet their cash needs and keep the business afloat. It involves a trucking company selling the invoices issued to clients to a factoring company in exchange for immediate cash.
The factoring company will then work with clients to collect and process the invoice thus leaving the trucking company to focus on growing the business instead. Truck factoring may easily come off as a loan but it’s a bit different.
Instead of a bank, a trucking company will turn to a factoring lender who will buy the trucking company’s unpaid invoices. The factoring company will then collect the payment from the invoice.
However, there are certain charges involved in the process but the amount depends on the factoring company. Some companies charge application fees when registering and collection fees so trucking companies need to understand the fee structure before signing an invoice factoring contract.
But what trucking companies should expect to pay is a small percentage of each invoice’s value to the factoring company.
How Truck Factoring Works
A truck factoring process starts when the trucking business issues their client with an invoice for work done. There must be an invoice sent to the client before a trucking company can initiate a truck factoring process since the factoring agreement is based on the client invoice.
The next step involves assigning invoices to the factoring company. Low volume factoring involves the trucking company selecting what invoices to factor while high volume factoring involves the company assigning all invoices to the factoring company for them to collect.
Depending on what the trucking company and the factoring provider agree to, the factoring company will then proceed to pay the trucking company a certain percentage of the value of the invoices. The amount paid depends on the advance rate agreed to by the factoring company.
The factoring company then assumes full responsibility of collecting customer payment and follows up with the client, who will then pay off the invoice to the factoring company. The payments are usually sent to a lockbox in the name of the trucking company.
After the factoring company takes their fees from the customer’s payment, they will then forward the remainder to the trucking company.
Types Of Freight Factoring
There are two types of freight invoice factoring namely recourse and non-recourse factoring. Recourse factoring involves your company being fully responsible if the debtor fails to pay the invoice. The charges associated with a recourse factoring arrangement are usually less since the risk is shared in the chance that a debtor fails to pay.
To reduce the possibility of such events from happening, the invoice factoring company provides credit checks on clients. This allows the freight company to make more informed decisions before agreeing to take up the client’s work.
Non-recourse factoring contracts also protect freight companies if the client doesn’t pay. In such an event, the freight company is not held financially liable and the factoring company assumes the responsibility. The fees, however, with non-recourse factoring are generally higher but it is the better option if a freight company cannot afford to risk a debtor failing to pay.
Benefits Of Freight Factoring
As highlighted above, truck factoring can be a convenient financing solution for a freight company. As precaution advice, experienced players in the logistics industry actually recommend that new trucking companies secure a factoring partnership so they don’t have to go through the process of setting up when they need immediate cash.
Here are some of the benefits that you can expect from freight factoring.
1. Truck Factoring Offers Quick Cash Flow
Traditional lending options such as bank loans tend to take a lot of time; time that small businesses usually don’t have. For example, your truck fleet may need servicing that requires immediate cash. Every trucking business owner knows that every day a truck is not on the move is a day they are not making money.
The thing with banks is they need a lot of paperwork filled then there are certain criteria you have to fulfill to qualify to find out if you’re eligible for a loan; all of which can take weeks.
But with truck factoring, you don’t have to wait that long to get paid. A lot of factoring companies understand the nature of the logistics industry and how hard it can be at times following up with your clients. As such, they offer quick payments; usually within 24 to 48 hours.
This can help trucking companies maintain a reliable cash flow which will allow them to repair trucks, pay salaries in good time, and pay for gas, office rent, and utility bills on time.
2. It Is A Much More Flexible Option
A lot of trucking companies, or any businesses for that matter, will not work with customers that tend to delay their payments as this puts their business at risk. Consequently, the reluctance by trucking business owners causes them to lose business.
But by working with a truck factoring company that takes invoices within 2 to 3 months, trucking companies won’t have to turn down their customers any longer. Invoice factoring is a lot faster so that you can use it to grow your business.
Truck factoring is also convenient in that it allows you to choose which invoice you want to use the factoring services on since you may not factoring services for each client.
3. Can Help Track Invoices
Invoicing clients and making sure payments are made on time can be quite the challenge especially since the payments may not be made for maybe 30 to 90 days, or even longer. Trucking company owners can save themselves the work of managing accounts payable on their own or even hiring extra staff to keep track of their invoices since that is a service very well provided by factoring companies.
4. Helps Trucking Companies Avoid Debt
Just because your trucking business is struggling financially doesn’t mean you have to go into debt with finance institutions like the banks. You can easily avoid business loans by funding your business through freight invoice factoring.
Unlike borrowing cash like you would with a bank loan, invoice factoring allows you to get paid for work done in advance so you can expand your operations. The best part about this is that you will not owe any lender money after the work is done.
5. Are Ideal For New Trucking Companies
Things can get a bit complicated financially if you are starting a new business. As such, it is often necessary to have money to pay for emerging expenses such as fuel and office rent before you start receiving money for work done.
New small trucking companies don’t have a good credit history and such, may find it hard acquiring a bank loan but with a factoring company, they can get their hard-earned money when they need it the most, and in good time too.
The Bottom Line On Freight Factoring For Trucking Companies
It is important to have a consistent and reliable cash stream regardless of whatever field you are starting a business in. Each business experiences fluctuations so it is vital for the survival of your business that you are ready with a fast and effective financial solution when you need it.
For trucking companies, there can often be surprises such as emergency truck repairs or fuel price spikes. To be prepared for such situations, you may want a steady source of sourcing that extra money since loans can take a long time before they’re processed.
Truck factoring and freight factoring can save you the hassle waiting for your customers to honor their invoices with fewer requirements and much less paperwork so you can instantly get the money you want to get your business running.
This way, you also won’t have to wait on long invoice cycles as you can pay for business expenses and salaries with the money you get from the invoice factoring provider.
