Despite being composed mainly of small and medium-sized businesses, the trucking industry is one of the biggest and most fundamental industries in the U.S. today. As per the American Trucking Associations’ (ATA), 80% of freight (11.84 billion tons) was transported by truck in 2020, generating just over $790 billion in revenue.
But while truckers move billions of dollars of goods across the country every year, a lot of them have struggled with a myriad of hurdles, especially when it comes to maintaining good cash flow.
What Is Cash Flow
A company’s cash flow is the money that flows in against the money that leaves. A company with more income than costs has a positive cash flow. However, positive cash flow is not to be confused with profit. Even the most profitable of companies can close its doors if it has more money leaving the business than the amount coming in.
The trucking industry is a very unpredictable industry with high demand and clients who insist on on-time delivery. Unfortunately, you’ll find that clients also take weeks or even months to pay their invoices.
Such income gaps can cause a company to deplete its cash reserves as it waits for clients to make their payments. The situation gets even direr when you consider that small companies usually don’t have that flexibility. As such, trucking companies often turn to factoring as a convenient financing solution.
This article breaks down what truck factoring entails and the benefits it promises to truck businesses.
What is Truck Factoring
Truck factoring has become a very popular way for trucking companies to better their cash flow. It is a process where a trucking company sells a client invoice for delivered loads for the purpose of getting instant cash rather than wait for several days for the client to pay up. The factor then collects full payment from the trucker’s client(s).
There are currently two approaches to factoring in the market namely recourse and non-recourse factoring.
With a recourse factoring arrangement, the trucker is meant to buy back the factored invoice in case their client is unable to pay the factor. In non-recourse factoring, the factoring company takes full financial liability in the probability that the trucker’s clients default on their payments.
Both types of factoring pose different pros and cons. For instance, while non-recourse factoring absolves the trucking company from any financial liability, it is much more costly than recourse factoring. Recourse factoring has friendlier rates but can expose the trucking company to bad debt should their client fail to pay the factor.
For you to be able to understand more about factoring and the type of factoring best suited to your business needs, let’s take a brief look at what the process of factoring involves.
How Truck Factoring Works
Most people would associate factoring with acquiring a business loan but the dynamics are entirely different.
When you factor your invoices for hauled loads in order to get a cash advance, you’re getting money that you’ve earned and fully belongs to you. Your financial provider does not expect you to pay back the cash advance provided since they are collecting from your client instead.
You’ll find that while a bank may ask for collateral in the form of an asset, the factor simply requires unpaid invoices. Simple right?
All you have to do is register with a factoring services provider company such as factorfinders.com and submit an invoice that has already been issued to a client.
Once the factor approves your invoice, the company will give you a cash advance amounting to between 80% and 95% of the value detailed in the invoice. Some factoring companies even give a full advance depending on the relationship between them and the trucking company.
The factor then takes full responsibility for collecting the outstanding payment from the trucker’s client. Once the factor receives full payment, they deduct their fees and issue the trucker the remainder of the paid amount if there is any.
Advantages of Factoring for Trucking Companies
Whether you’re a single truck or an entire fleet on the road, factoring can be of benefit to your freight business in many ways. Here’s a list of some of the benefits you can expect from truck factoring.
1. Solves Cash Flow Problems
As explained above, trucking companies require to have a steady cash flow to pay for business costs so that they can take on new clients. Factoring provides carriers with the float they need to pay for recurrent costs such as driver salaries, taxes, fuel, and regular truck maintenance.
Factoring also provides cash that helps truckers pay for unexpected expenses that may arise along the way. One of your trucks may break down, placing you in a position where you might have to outsource a truck from a different carrier.
2. Factoring Provides Working Capital
Every business requires working capital to grow and expand into new markets. However, a lot of carriers do not have access to working capital because of late payments from clients. This means they often find it hard to cover the cost of adding new trucks to the fleet or taking on new clients.
Factoring frees trucking companies from having to wait weeks or months for customers to pay. It provides them with quick access to money they can use as working capital to expand their scope of operations.
3. The Trucker’s Credit Score Is Insignificant To the Process
One very promising benefit that comes with factoring is that the credit rating of the trucking company seeking factoring services is not necessary for them to receive a cash advance.
Since factoring companies do not collect payment from the party doing the factoring, they have no interest in their credit status. Factors are, instead, interested in the credit score of the client whose invoice is getting factored.
As such, even if the trucker has a poor credit score, this will not prevent them from receiving the cash advance they need from factoring.
4. Frees up the Trucker To Focus More on the Business
By factoring, trucking companies allow the factor to handle the ugly side of doing business; debt follow-ups. This gives the trucking company owner or manager the freedom to focus on other aspects of the business that are in more need of their attention such as marketing and talent management.
By outsourcing the money collection function of the business, a carrier saves time and resources it would have otherwise committed to hiring in-house staff to perform client account management duties.
5. Cash Advances Are Processed Within No Time
The beauty of factoring is that it does a very good job in eliminating the time factor in two ways.
First, truckers no longer have to wait for weeks or months for clients to pay up. Factoring gives them the cash they need for business to proceed without financial hitches. Secondly, it means truckers don’t have to use traditional lending options that often take long before approval.
Banks, for instance, are the go-to for most businesses requiring a business loan. Unfortunately, they have a very long process where they have to check your company’s credit rating while considering the financial relationship existing between the company and the bank. Some institutions even demand collateral as a prerequisite as highlighted earlier.
But factors don’t require any collateral, do not consider your credit rating, and they process the money within 24 to 48 hours of the trucking company applying for an advance.
6. Factoring Protects Trucking Companies From Bad Debts
One benefit of factoring that does not get as much attention as it deserves is protecting from bad debt. Bad debts happen when a client proves unlikely to make a full payment for goods delivered.
Factoring, however, protects trucking companies from incurring bad debt in two ways, the first of which is non-recourse factoring as stated above. Non-recourse factoring protects the trucker from being rendered liable for non-payment of their clients since the factor cannot compel the trucker to buy back the invoice.
Factoring also helps truckers avoid bad debt by allowing the trucker access to credit reports of potential clients. This provides the trucker with insight into a prospective client’s creditworthiness. This helps them to determine whether or not they should proceed to take up the new business.
Consider Factorfinders.com as Your Ideal Factoring Partner
Cash flow is very important not just to trucking companies, but to any business that’s operational. Lags in revenue can render the business unable to pay for its operational costs.
For truckers, cash flow is critical to making payroll, fueling delivery trucks, and maintaining office space. For these reasons, factoring with factorfinders.com can be a very convenient and friendly financing tool for trucking businesses.
They provide secure fast funding for both outstanding and new invoices for truckers. Registration is easy and takes about two business days from where clients often receive funding within 24 hours. There are no monthly minimums and no limits to how much you can receive.
Visit factorfinders.com to learn more about their services.
