The Top Pros and Cons of Truck Factoring

Businessby Mashum Mollah02 March 2021

Truck Factoring

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 be very well running 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:

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 circumstance 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 don’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 customers’ 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 on.

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 happens 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:

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, it’s very likely that there are 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 keeping confidential.

Choose the Right Truck Factoring Company for Your Business Needs:

Cash flow is important for any business regardless of its industry it operates in. 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 outweigh 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 the difficult times so you can focus your attention on serving your clients, expanding your client base, and growing your business.

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Mashum Mollah

Mashum Mollah is the man behind TheDailyNotes. He loves sharing his experiences on popular sites- Mashum Mollah, etc.

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