Without a regular and consistent income, no trucking or freight business can keep the doors open for long. Every business in every industry relies on selling their products or services and the money coming in as a result of the sales. Without this income, a trucking business wouldn’t be able to pay its drivers, purchase and maintain trucks, or keep up with rent for the home office.
Clearly, keeping up with cash flow needs is integral to the survival of any freight business. However, the situation becomes even more dire when clients are given the opportunity to wait weeks or even months before paying. When this happens, trucking businesses are left trying to make things work with limited resources. This can lead to a failure to deliver products on time, lack of growth, and even the loss of talented drivers who might leave due to their frustration with payroll.
Waiting for delayed payments can drastically slow a business down, reducing its chances for success in today’s competitive market. One option to help trucking business in this time of need is invoice factoring.
What is factoring?
Factoring already helps many freight and trucking companies to meet their cash needs and keep the business going. Factoring is particularly well-suited for the industry’s needs as it is flexible enough to work with the trucking industry’s often unpredictable business cycle and can be performed on a load-by-load basis. In fact, over a third (36.4%) of all invoices processed for funding are made up of those factored by freight factoring companies.
Invoice factoring (also known as “invoice financing,” “accounts receivable financing,” and “receivables financing”) involves selling invoices to a factoring company in exchange for immediate cash. Factoring companies then work with clients to collect and process these invoices. This means that a transportation business can spend less time taking care of invoices and more time growing the company.
There are typically fees involved in this process, but it varies from company to company. Usually, a business can expect to pay a small percentage of each invoice’s value to the factoring company. There may also be application or collection fees, so it’s important to clearly understand the fee structure before agreeing to work with any factoring company.
While you do end up getting less than the full amount of invoices processed by a factoring company, you do get immediate funds. This can be life-saving if your business needs to pay bills now and can’t afford to wait around.
How does factoring work?
If invoice factoring looks like a good fit for your freight business, here’s a look at how the process typically works:
- Meet with an invoice factoring representative who guides you through figuring out which factoring service will help your freight business the most. Expect for them to ask for a bill of lading or proof of delivery and a rate sheet.
- Take 15 minutes to fill out an application. Your client’s credit history is going to come into play at this point as factoring companies usually look at this rather than the credit history of your business. Many trucking factoring companies offer the ability to upload documents online which is convenient if your role has you spending most of your time on the road.
- Once your application has been processed, work with your factoring company to determine the best way to receive the funds (which will usually be most but not all of the invoice’s value). Usually, you can expect to receive the money through direct deposit, but many of these companies have additional options such as the ability to have funds deposited directly onto your drivers’ fuel cards.
- Your clients will then pay the factoring company directly rather than your business. Once your clients have paid, the factoring company will send the remaining balance (minus fees) to you.
Many companies in the trucking and freight industry are already familiar with the invoice factoring process, so this can help reassure your customers when they are contacted by the 3rd party collecting payment.
The advantages and disadvantages of factoring
Factoring receivables isn’t necessarily the best option for all companies, even those in the trucking industry. When making your decision, be sure to take a look at the advantages and disadvantages of factoring, including:
Advantages
- Improve business’s cash flow
- Ability to submit bids for potential jobs
- Invoices serve as collateral
- The money can be used as you see appropriate (fuel costs, maintenance of trucks, additional driver hiring, etc.)
- Additional capital for your trucking business without being offset by added debt
- Decisions are largely based on your customers’ credit history, not the business’s
Disadvantages
- Fees take a small portion of the funds you’d receive from clients
- The fees charged by factoring companies can increase if customers end up being slow to pay their invoices
- Hidden costs can sometimes pop up, so it’s important to make sure everything is clearly laid out before agreeing to any service
Unfortunately, the very nature of the trucking business can often make a consistent cash flow seem impossible to reach. If your clients are repeatedly late in payment or you’re having difficulty paying drivers on time in a business cycle lull, this could be an opportune time to look at factoring in-depth to see if this strategy is a viable option for your business. It could mean the difference between obstructed growth or an exciting opportunity to continue reaching new heights with your transportation business.