As is with almost any industry, through the financial year, you’re going to experience unsteady business environments depending on the current state of the economy as well as the time of year.
For trucking company owners, they need reliable cash flow to buy fuel, maintain their fleet of trucks, pay drivers, and pay for other business costs such as office rent. Unfortunately, the truth about doing business is you could very well run out of money despite how profitable you may be.
A study by the U.S. Bank found that over 80% of businesses in the United States crash not because they are unable to offer good quality service or get good customers but as a result of problems with their cash flow. The same applies to trucking companies.
If you don’t have a sustainable business plan for your trucking enterprise, you could get stuck with a big cash flow issue which could bring your business to its knees. Everything from delayed customer payments to abrupt vehicle repairs may limit your cash flow.
As a solution, trucking companies sell client invoices to invoice factoring service providers. Invoice factors buy the invoices and in return, provide the trucking companies with the cash flow they need to operate seamlessly.
Let’s take a closer look at what truck factoring is as well as its pros and cons.
What is Truck Factoring:
Truck factoring is a form of invoice factoring set up for trucking company owners. The concept behind it is fairly easy to understand. A trucking company will sell its outstanding invoices to a factoring company.
Factoring companies often pay a lump sum of money to the trucking company (usually between 65% and 90% of the invoice price). This money is paid to the bank account of the factoring company in no more than 24 to 48 hours and can be instantly used as working capital. The factoring company will then collect the full invoice payment from your client.
As great as this may sound to trucking companies before you use a factoring service, you should know that the factor just won’t take any invoice you offer. They’ll have to do a credit check on your client to ensure they’ll be paid on time.
You should also know that you’re not going to get the full value of the invoice when you sell it to a factoring service. The factor deducts different preset fees that vary with the amount involved, the service provided, and the circumstances behind it all.
Truck factoring has a lot of potential with a few shortcomings. Let’s review some of them below.
Pros of Truck Factoring:
Instant Cash Flow:
Applying for financing options such as business loans tend to take weeks if not months before they’re approved. This means it will take you a much longer time to receive the funding you need to keep your business doors open.
Truck factoring, in comparison, gives trucking companies immediate cash to keep their operations running without a hitch. If you need instant cash, invoice factoring is the most viable choice for you. You won’t have to wait for weeks or months to get approval, and you won’t have to wait for your clients to make their payments.
It helps to find a good factoring provider early in advance and open a profile with the company even if you do not need the service just yet. You’ll find that it’ll save you considerable time when you have everything ready as compared to starting from scratch.
Constant Cash Flow:
High chances are that factoring in your invoices will not be a one-off thing.
A good idea would be to establish a good working relationship with a factoring company. This will help you maintain cash flow since the process of selling the invoice will be a lot easier. The more invoices you factor in, the more your line of credit grows so you can get instant funding.
Even if you have a steady cash reserve, the unpredictable nature of the trucking business means you might have to factor in your invoice at some point. For instance, you might land a big, lucrative contract but you do not have enough money to service the contract so what do you do? Factor your invoices of course!
High Chances of Approval:
Unlike funding providers such as banks, your loan history, credit score, and collateral are not big factors that will decide if your trucking company can use an invoice factoring service or not.
Usually, the factoring company is more concerned about your customer’s willingness to make payments. As such, factoring companies often do credit checks on our clients. This gives them a clear picture of the kind of risk they may be taking.
Another advantage to this is that the invoices you factor serve as collateral. That means you won’t have to worry about bequeathing machinery, real estate property, or other business assets as collateral for you to receive the working capital you need.
So if you have a low credit score or are already servicing an existing loan from a bank, invoice factoring may be the best option for you.
Outsourcing Debt Collection:
As a trucking company owner, some of your responsibilities can be hard and very frustrating. Invoice follow-up and collection happen to be one of those tasks. It’s an exhausting, time-consuming affair that might even dent the working relationships you have with some clients.
But with invoice factoring, you don’t have to keep track of outstanding invoices or follow up with your clients anymore regarding payments.
The factoring company you sell your invoices to will take this work off of your plate so you can fully focus on improving your business. This can go a long way in maintaining strong and fruitful relationships with your clients.
Cons of Truck Factoring
Here are some Challenges of Trucking Services:
Bad Clients May Cost You:
Nearly all freight factoring companies that offer recourse factoring will require you to buy back the invoices again if they go past their due date and have not been paid. This may prove to be an inconvenience especially if you don’t have the cash at hand and will risk ruining your line of credit with the factoring provider.
Although factoring companies often do a credit check before agreeing to buy an invoice, it helps to factor in invoices from reputable clients who you know are going to pay within the agreed-upon time.
Costs More than Traditional Lending Options:
You might find that the fees of factoring an invoice may be higher than the interest you’d pay if you took a loan from a traditional lender such as a bank.
Another thing you should be wary of is hidden fees. A factoring company may advertise a rate better than its competition which you might find alluring. But when the rates are too good, there are likely associated fees you might incur in addition to the interest rate. This might inflate the overall costs of factoring your invoice thus reducing your profit margin.
Examples of charges you should ask your factoring company are transfer fees, volume fees, registration fees, credit check fees, and termination fees.
Only Limited to Invoices:
Another downside to factoring is that it solves a very specific problem and leaves it at that. Truck factoring is designed to help trucking companies manage cash flow problems imposed by late payments from clients.
As such, if you need capital to invest in your trucking company like expanding your fleet of trucks, an invoice factoring company may not be the ideal solution for you.
May Compromise Your Business Relationships With Your Clients:
While some trucking companies prefer to outsource the debt collection aspect of the business, this may work to their detriment on certain occasions.
Firstly, some clients prefer to engage with the trucking business directly which may cause a bit of friction between all parties involved.
Secondly, they may not be so comfortable knowing that the trucking company they worked with had a different party with whom the client did not engage in business looking up their credit status. An individual’s credit score is sensitive information that people like to keep confidential.
How Does Truck Factoring Work? | Steps of The Factoring Process
As you know by now truck factory or invoice factory is a financial service that helps stock companies improve cash flow by selling their unpaid invoices to a factoring company at a discount.
The process allows trucking businesses to receive cash quickly rather than waiting 30, 60 or even 90 days for shippers to pay their invoices. Here’s how it works:
- Delivery and invoice creation
After a trucking company delivers a load it issues an invoice to the shipper or broker. Instead of waiting for the customer to pay, the company sells this invoice to a factoring company.
- Selling invoice to factoring company
Next, the trucking company submit the invoice to the factoring company. Once the factoring company verify the invoice’s validity it typically advances 85 to 95% of the invoice’s value to the trucking company within a day or two. This advance gives the trucking company immediate access to cash to cover their expenses such as payroll, fuel and maintenance.
- The factoring company collects payment.
The factoring company then collects the payment directly from the customer which can be a broker or a shipper. After the customer pace the invoice, the factoring company reduces the remaining balance to the trucking company – a small factoring fee which can be around 1-5%
- Fees and terms
The cost of factoring services can vary depending on the factoring company the creditworthiness of the client’s customers, and the volume of invoices. Some factoring agreements are recourse implying the trucking company is responsible if the customer does not pay. While non-course agreements place the response the factoring company do non-records typically costs more.
Choose the Right Truck Factoring Company for Your Business Needs
Cash flow is important for any business regardless of the industry it operates. A positive cash flow contributes to the overall growth of a business by helping fund its daily operations.
If you are contemplating if you should use a truck factoring company to boost your cash flow, you need to assess which outweighs the other between the potential benefits and drawbacks to factoring your client invoices.
Try and choose a factoring company with an ideal program that suits your business needs. You want to work with a company that is flexible, can be trusted, and has experience in the trucking industry.
A good truck factoring company will help you maintain a sustainable business through difficult times so you can focus your attention on serving your clients, expanding your client base, and growing your business.
Some trucking factoring companies
Here are some top trekking factoring companies that can stand out for their offerings in terms of customer service. Check out the list:
- Apex Capital Corp has been in the factoring business since 1995 and they provide both recourse and nonrecourse factoring with a two per cent fla flat rate on invoices. Apex also offers no termination fees free credit checks fuel discounts and an online account portal. This company is known for its responsive customer response which makes it ideal for both new and experienced businesses.
- OTR Solutions is known for its simplicity and flexibility. This company also provides non-records and records options along with same-day payments. They do not require monthly minimums or volume limits, which makes them a good fit for smaller truck companies. They also offer online mobile and voice options which makes it easier for truckers to manage payment on the go.
- RTS financial office competitive rates and can ensure 97% of invoice value a front. It is popular for its fuel card program and high-quality customer support through phone, email and chat. RTS also provides additional business tools such as the use of a friendly mobile app and equipment leasing.
- Porter freight funding supports both large and small trucking businesses, with flexible factoring services and short-term contracts. Porter freight also provides added benefits such as insurance quotes, free fuel cards and compliance assistant. This makes it ideal for truckers looking for a one-stop solution.
- Thunder funding is founded by truckers and is known for its transparency and competitive rates ranging from 2 to 4% per invoice. Thunder funding is unique for providing full contract transparency before commitment which ensures that urs not exactly what they are signing up for.
Each of these companies offers unique advantages b.Ed back office support, fuel discounts or flexural contract for selecting a company or not be sure to review contract rates, terms and additional fees to find the one that best meets your trucking business.
Wrapping it Up
That was all about truck factoring and how it works. The article also illustrates the frozen cons of the process and how you can choose the right kind for your business.
So if you are wondering about the steps involved in the truck factory and how you can make the decision of choosing the right kind of truck factory company this article will help you a lot. If you have anything else that we can answer for you, shoot to the comment below.
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