Businesses in trucking, freight, and transportation rely heavily on invoice factoring for growth and to sustain their business. A 2017 industry survey by the IFA found that one-third of funding in the transportation industry comes from freight factoring. It enables trucking companies to keep their actual and proverbial wheels turning without a hitch.
Understanding Factoring in Relation to the Trucking Industry
Invoice factoring is a financial solution involving selling invoices which gives the company access to instant cash flow. This allows the company to focus on growth rather than trying to stay afloat. Companies deduct a marginal percentage of the invoice you factor from them.
It could be the solution you are looking for your trucking company if delayed invoice clearance has become a problem. There are several companies, like ezfreightfactoring.com that offer same day or next day invoice factoring. You won’t have to wait weeks or months to get paid when the company offers you instant payments. You can focus your business operations on hauling more load and growing.
How Does Factoring Work?
Factoring is a type of finance solution. It places capital in your hands almost instantly as the business owner. You would need to sign up with a company first. Terms of agreement differ as per providers. For instance, few companies may charge 3% fee while others may charge 7 – 8%.
This is how the process works:
- As a trucking company you would deliver the load for your client. It usually takes 30 days in the transport industry to have bills cleared. However, you still have to pay the drivers and require fuel.
- You shortlist companies and ask them about their process. Most companies have a seamless online process wherein you upload your invoice online. Or, you can always call the truck factoring provider you want to work with and send them your invoices.
- It doesn’t take more than 24 to 48 hours to get paid in most cases as long as you agree on the terms and conditions. Most companies understand the urgency of clearing invoices quickly – certainly when energy and the cost for goods are increasing because of new policies. The fee charged by the provider will determine the money deposited in your account. For instance, you would receive $970 in your account if the invoice was for $1,000 with a 3% fee.
- The company will take care of collections from your client. In non-recourse you won’t even have to absorb losses if the customer doesn’t clear their dues.
Prevent Cash Flow Squeeze
Cash flow is a major problem among small and medium sized businesses in a wide range of sectors. However, this is more so in the trucking industry. Clients are generally slow to clear their invoices. Expenses can end up being higher than the amount expected from projected sales.
Trucking industry is subject to other forms of carrier cash flow troubles as well. These can be routine or sporadic depending on the season and the type of cargo you pick up. The gap between when a trucker gets paid and when the load is delivered is lengthy. This is the problem in both small and large trucking outfits.
Truck factoring takes care of this cash flow gap by allowing freight companies to get their payment without much delay.
Flexibility Through Freight Bill Factoring
Trucking is different from regular businesses where there is a consistent flow of new work. Hauling goods is an unpredictable business. It involves waiting, traffic delays, bidding on jobs, and other forms of slowdowns.
It is an ideally suited option for trucking companies since it allows you to collect cash on a load by load or case by case basis. Business loans can offer the same type of working capital. However, these involve long term planning. They also need predictable and consistent revenue generation. Many trucking companies find it easier to factor their invoices through a reputable company as opposed to seeking a bank loan.
Get Immediate Cash Without Paying A Lot
It is a buyer’s market when it comes to trucking or freight factoring. The company will offer you competitive rates since they have to compete for your business. This can be done by offering flat fees and low rates. Many companies offer perks as well in the form of fuel cards and other extras.
Freight factoring in any case relies on the credit worthiness of your client rather than your business. This makes it an accessible option for the smallest of firms. Most transportation and trucking businesses are small outfits with only a dozen or so trucks. Applying for business loans can be out of reach with so many new trucking businesses cropping up every day.
Businesses can get the cash they need with a trucking factoring company as long as they have a credit worthy and verifiable client. Transport companies don’t need to be well-established, demonstrate profitability, or have a proven business plan. All companies require is an invoice that the transport company is waiting to be paid on.
There are various different types of factoring. For instance, spot factoring will allow a trucker to get paid on a single invoice. This way they can pay for insurance, fuel and have a little extra for picking up their next load. The best part is that you won’t have to pay a lot for getting your hands on working capital.
Free Up Working Capital by Factoring Freight Bills
Every business requires access to working capital for growth. Working capital locked in receivables cannot be used for paying operational expenses, covering the cost of business acquisition, or meeting payroll among others. Your growth can be stalled because of a lack of cash flow.
Trucking companies that have their invoices factored get their hands on immediate access to working capital. This money may otherwise get locked for months or weeks. This is one of the primary ways by which a trucking firm loses new business. Freeing up working capital allows them to invest in other things.
Attain Financial Leverage with Factoring Invoices
Factoring freight bills provides businesses with the capability to offer more attractive and competitive rates to potential customers. It also affords leverage over vendors and suppliers. You can negotiate more favorable terms and conditions with working capital in hand rather than having it locked in customer receivables.
You can attain improved profitability for your trucking business with this type of cost savings. In most cases, the fees required for speeding up the cash flow process is lower than the amount you would save with quick-pay vendor discounts.
Reduce Operational Costs with Factoring Freight Bills
Another way by which it helps in cost savings is by saving money on operational expenses. Operational costs associated with accounts receivables and bookkeeping can be eliminated altogether or reduced to a significant percentage.
Trucking companies factoring without recourse can also eliminate or reduce the risk of bad debt. This is because the company in this form assumes all the credit risk.
Types of Freight Factoring
There are four types of factoring in the transport industry. They behave differently even though they depend on outstanding invoices.
- Spot: This is an agreement allowing the company to choose the invoices they want to make part of the agreement. Companies don’t need to factor all outstanding invoices with this.
- Contract: All outstanding invoices are factored in this. The trucking company cannot pick and choose among different invoices they want to get factored.
- Recourse: The freight company is responsible for all bad debts in this type. The company needs to buy back customer invoices that remain unpaid.
- Nonrecourse: In this type there is zero risk to the trucking company. The firm assumes all risks associated with unpaid invoices. However, the rates in this type of invoice are typically higher.
Choosing the Right Freight Factoring Firm
Invoice or freight factoring refers to the act of selling customer receivable invoices or freight bills to a company. However, the only way you can enjoy complete benefits of this process is if you work with a company that understands your industry. Firms offer immediate payments to allow trucking companies to get back on the road and grow their business.
These are a few features you should look for in a freight factoring company:
- Competitive advances
- Low fees
- Short term contracts
- No monthly minimum
- Small invoice amounts
- Micro or spot factoring
- Credit checks
- Fast funding options
- No due diligence or application fee
- No hidden charges
- Professional and courteous customer service
It is important to understand that every company is different. You should consider choosing a service that is specifically tailor made to serve the unique needs of the trucking industry.
Key Takeaways
Invoice factoring has tremendous advantages to both small and big trucking firms. There are various ways by which a firm can help you acquire new customers and grow your business overall.
