Being successful in the freight industry requires a lot of effort and the working capital to match it. they often experience income gaps while waiting for clients to settle their payments. Unfortunately for the carrier, such scenarios often disrupt their cash flow.
A company’s cash flow is the amount of money flowing into and out of the company. If you have more cash flowing in than it is flowing out, you’re in what is described as a positive cash flow.
Having a positive cash flow is critical to the overall growth and profitability of your trucking business. Cash flow makes sure your doors stay open and that your clients’ freight is always on the move.
Cash Flow Problems in the Freight Industry
Cash flow in the trucking industry can be hard to manage for two reasons; late-paying customers and heavy operational costs. A combination of these two can be too overwhelming for trucking small and middle-sized companies without the wherewithal to maintain positive cash flow.
The situation can get even more difficult when you consider how industry dynamics have made business increasingly complex and competitive for trucking businesses. Cost-cutting, world-class technologies plus the pandemic have severely affected business operations and profitability in the industry.
If your fleet is the embodiment of your operations, then consider cash flow to be the lifeblood of your business. It helps you pay everything from taxes, fuel for your trucks, and payroll.
However, unless you do a bit of farming on the side, money doesn’t quite exactly grow from gardens. You need to get it from somewhere else, and what better resource to get instant cash flow than freight factoring.
Freight Factoring as a Prime Cash Flow Solution
If you’re involved in the trucking business, more so in a financial capacity, you might have come across the term ‘freight factoring’ or ‘accounts receivable factoring’ being thrown around. That might be because, in the past several years, freight factoring has emerged as a popular way for trucking businesses to avoid income gaps.
But plenty of truck drivers and even business owners don’t exactly understand how it works and how it can benefit their companies. Let’s break it down in detail.
Freight factoring or truck factoring is a financial tool that provides freight businesses with immediate cash when they sell client invoices to a factor or factoring company.
Customers usually take 60 or 90 days to pay their invoices. For some trucking companies, especially those that are in the startup phase, this time is often too long to go since they have costs of their own that they need to pay. But with factoring, trucking companies often receive the cash within 24 or 48 hours of application.
Factoring does not work the same way as business loans do since factors provide trucking companies receives cash for money they’ve already earned from hauling loads for their clients. This means they don’t have to pay back the cash advance received.
And while business loans may take weeks before they are approved (that’s if they even do), factoring only takes a matter of hours before the carrier receives the cash advance they need to keep going.
But how does the factoring company make their money back?
For starters, they buy invoices at a discount which is often very marginal (usually between 1% to 3%. Secondly, the trucker’s client whose invoice was factored in pays the factoring company instead of the trucker who will have already received their money.
Payment collection, however, is not always as swift. That’s why there are two kinds of factoring namely recourse factoring and non-recourse factoring.
Understanding Recourse and Non-Recourse Factoring
Recourse factoring happens to be the most common form of factoring practiced today. It simply means that a trucking company is responsible for non-payment from their clients and has to buy back the factored invoices from the factoring company.
With non-recourse factoring, the factor assumes full liability of the invoice bought, including the risk of non-payment.
As such, non-recourse factoring options tend to be more costly to the trucking company. Factoring companies also restrict factoring invoices to debtors with a positive credit report. Debtors with a poor reflection on their credit reports are not eligible for non-recourse factoring.
How Freight Factoring Can Help Your Trucking Business Grow
Now that we have established that factoring is a big deal in the freight industry, let’s look at some of the benefits trucking companies can expect from the practice.
1. Helps The Trucking Business Achieve High-Profit Margins
The world is opening up every day as a result of globalization. This has caused a high demand for freight services, with businesses and individual clients all in need of hauling services for certain loads.
As a result, trucking companies have been compelled to ramp up and make their business operations more efficient and innovative. Making sure company equipment is operating at peak capacity is vital in increasing profit margins.
Unfortunately, higher operational expenses and lagging client payments can bring a company down on its knees. Even a highly successful trucking company goes through instances where its expenses exceed the cash it has on hand.
Freight factoring presents a fast and reliable solution for trucking businesses to create the steady cash flow they need to make operations more efficient and pay for business costs so that they can expand the profit margins of the business.
2. Freight Factoring Services Are Suited for the Trucking Industry
When running any kind of business that requires you establishing a good working relationship with a financial provider, you need to make sure the financial institution has some sort of experience or expertise in your industry of operations.
When it comes to the transportation industry, dispatch trucking companies and freight factoring companies have specialized in providing custom solutions to trucking companies because they have detailed insight into how the industry operates. This makes them a very convenient and reliable financial partner for trucking companies to work with.
3. You Can Use the Money to Pay for Any Operational Costs
This is one highly overlooked benefit that comes with freight factoring. The cash advance trucking companies receive from factoring is not restricted to paying for certain costs.
You’ll find that other business financing options such as business loans require the business to use the loaned money strictly to cover a particular cost. During the application process, the bank will require the business to stipulate what exactly it is they need the loan for.
In certain situations, the bank might even implement follow-up procedures to make sure that’s how the money was sent.
But with freight factoring, whatever the trucking company intends to do with the cash advance is up to them. It could be for servicing their existing fleet of trucks, buying new trucks, or even saving it as cash reserves for immediate use when the need arises.
4. Cash Advances Are Processed Quickly
Thanks to freight factoring, you don’t have to wait months to get paid for a delivered load. Many freight factors provide payments within the same day of applying or the next.
This means you will instantly get the money you need to pay off business costs without having to use your credit or seeking an alternative form of payment that may not exactly be viable for your business.
For instance, you might have won a lucrative contract but you do not have the money to service your trucks and pay for fuel yet you have pending payments from invoiced clients. You’ll find that unsecured loans or business loans can take weeks before they’re approved and the funds are reflected inside your account.
This is precious time that may not be on your side so what do you do? Factor of course!
5. Freight Factoring Can Protect You From Bad Debts
Bad debt is a frequent occurrence in the trucking industry and it happens when a customer fails to pay the invoice for goods hauled. But establishing a relationship with a factoring company can help prevent a trucking company from incurring bad debt in two ways.
Factoring companies often provide credit check services to trucking companies that they do business with. This provides the trucker with insight into the creditworthiness of potential clients. The trucking company can then determine whether they should proceed to take up business with the potential client.
The second way in which factors protect carriers from bad debt is through non-recourse factoring. As explained above, this form of factoring involves the factor assuming full responsibility for the factored invoice. This means the carrier is not financially liable in any way in case their client fails to honor their payment.
Consider Freight Factoring for Instant Cash
Ask any experienced trucking business manager or owner and they will tell you that maintaining a steady cash flow is just as important to their business as their most reliable truck. Fortunately, the freight factoring industry exists to help truckers solve issues with their cash flow.
Factoring provides trucking businesses with the cash they need to pay for both recurrent and unforeseen expenses. It will also protect your business from potential financial troubles while helping it become stronger and more competitive.
With a negative cash flow, your business might come to a stop if certain obligations aren’t met such as drivers’ salaries. But if you have the cash to cover your immediate costs, you’ll be better poised to continue your business running than you would have been waiting for months to receive payment on delivered loads.