What Is Truck Factoring and Why Is It Crucial For Trucking Companies

Positive cash flow is one of the most essential aspects of running a successful business. A healthy cash flow is the lifeblood of any enterprise.

Cash flow problems can threaten the life of businesses all around the world. These problems arise when a company does not have adequate liquid cash to pay for its liabilities.

As per the 2019 QuickBooks State of Small Business Cash Flow survey, 61% of small and medium-sized businesses (SMBs) struggle and expect to struggle with cash flow problems every year. A third of those SMBs were not able to service their loans and pay their suppliers or employees.

A business experiences a cash crunch when the expenditure of a company exceeds its inflows. This could be due to low-profit margins, over-investment in inventory, or problems with collecting client payments, an issue with which stakeholders in the trucking industry are too familiar.

Cash Flow Problems in the Trucking Business

Truckers make money by transporting customer loads to their intended destination. Simple right? Well, not exactly. Hefty operational expenses and late-paying clients make it very hard for trucking companies to sustain a positive cash flow. Payments are rarely ever done immediately in the trucking business, with clients usually taking up to 40 days or more to pay their freight bills.

If a trucking company is to keep its fleet on the road, it needs to have the right resources to fund its operations. But the lengthy process times can either make a trucking company’s budget or break it. For this reason, a trucking company needs to have reliable and affordable business financing solutions to improve the company’s cash flow.

Fortunately, a mix of emerging technologies, increased competition, and less complex business dynamics has provided the industry with an immediate solution to creating positive cash flow; truck factoring.

What Is Truck Factoring

Truck factoring is a fast and highly flexible solution for trucking businesses to create positive cash flow. It is a financial transaction between a trucking company and a third party (a factoring company) that offers immediate cash to the trucker in exchange for the business’s account receivables.

Simply put, a business that is in desperate funds can sell its accounts receivable to a factor at a discount in exchange for instant cash. So, how exactly does truck factoring work?

If a trucking company needs money urgently and some clients haven’t paid for already-delivered services, the trucker can register with a factoring company. Bear in mind that the trucker has to have invoiced their clients before submitting the invoices to the factor.

Once the lender verifies and agrees to buy the invoices, two actions follow. First, the factor gives the trucker a cash advance of around 80% to 95% of the invoice value. This process often takes 1-3 business days. Secondly, the factor assumes responsibility for collecting the outstanding payment from the invoiced clients.

After the clients have paid back the total amount of the invoice, the factor deducts the cash advance initially remitted to the business plus their factoring fees and issues a rebate for any balance to the trucker.

As you can see, the process is pretty straightforward. But like any other financial transaction, there are some items in the fine print that you should consider.

How Much Does Factoring Cost

Factoring companies determine their terms and rates depending on various factors.

A factor will consider the size of your business and your industry of operation, which in this case, is transportation. The amount of time your clients will take to pay their invoices is also considered. There is a big difference between having $30,000 out for 30 days compared to 90 days.

If your customer hesitates to make payments, you might be subject to ageing fees. The longer your customer takes to pay, the more you pay. How much from the invoice you need for your business will also affect your rate. The more money you need, the higher the rate. As such, you can either commit to a high- or low-volume factoring agreement.

While the process is similar between both approaches, there are a few key differences. Low volume factoring is ideal for smaller businesses since they have less business activity. This means they ask for lesser cash advances from factoring. The rates associate with low-volume factoring usually range from as low as 2% to 5%.

WIth high-volume factoring, companies that ask for enormous advances (up to $15 million a month) can expect rates from 0.5% to 5%.

The duration of the contract will also have an impact on the total cost of factoring. While some factors are okay with a company factoring invoices as they freely wish, other factoring companies insist on trucking companies factoring a certain number of invoices across a stipulated time.

Benefits of Truck Factoring

1. Helps Truckers Avoid Bad Debts

One of the often-overlooked advantages to truck factoring is that it can shield trucking companies from incurring bad debts. Bad debts happen when a customer fails to pay for services already rendered.

A trucking factoring company can help you if a customer cannot pay for a load you’ve delivered. How so? Well, there are two approaches to factoring; factoring with recourse and non-recourse factoring.

With recourse factoring, in the possibility that a client cannot pay, the trucking company is obligated to pay back the cash advance to the factor. But with non-recourse factoring, the factor absorbs the loss of the invoice. The trucking company is not liable for any debts or losses.

2. Gets Rid of Cash Flow Crunches

For a trucking business to grow and expand its operations, it needs consistent cash flow to take on new business, invest in modern equipment, and fund any necessary repairs.

Through factoring, a trucking business will allow a company to get cash in almost no time (24 to 72 hours), without having to wait for 30, 60, 0r even 90 days to receive client payments. Many truck factoring companies even have same-day funding, which will allow you to pay for fuel for your trucks and driver salaries without you having to look for a business loan.

3. Transforms Outstanding Customer Invoices Into Working Capital

Every business requires working capital to get things going. Without it, they cannot pay for operational costs, take on new clients, invest in the firm, or even pay their staff. If working capital is tied down for weeks or months by unpaid accounts receivable, the business will not grow as well as it should.

Factoring allows truckers to convert client receivables to working capital. This gives them the ability to invest in the business, making it more competitive and attractive to ideal clients.

4. Factoring Helps Truckers Save On Resources

The top factoring companies often provide added invoice management and debt collection services. This eliminates the need for trucking companies to spend valuable resources invoicing and checking on payments.

This frees the trucker to focus on strengthening other business functions such as marketing and business management, leading to greater profitability and productivity.

5. Credit Checks on Potential Customers

As a trucker providing payment terms to customers, you can’t afford to haul freight for just anyone. Checking the creditworthiness of shippers and brokers should be a business priority.

Factoring companies provide credit-checking services to truckers. This function provides trucking companies with valuable services regarding the credit strength of the prospective client. This helps the trucking company determine if they should haul the client’s goods and negotiate terms to protect the trucker better.

6. Factoring Provides More Financial Flexibility

Freight factoring sounds a lot like a loan, but it is everything but. In fact, most industry experts would argue that it is faster than bank loans and much more efficient.

Cash advances from factoring are processed within days, while it can take weeks or even months for a bank loan to be processed. This could be time that is simply not on your side.

Process times for bank loans take long because loan decisions are based on a series of criteria. They include the trucker’s credit rating, the number of years they have been in business, and the business relationship shared with the bank.

It also should come as no surprise that after waiting for weeks, you find that your bank loan request has been denied. It’s not strange for banks to deny small trucking businesses loans, especially if it’s still in the startup phase.

While a bank will assess your credit status, your credit standing will not impact your chances of receiving a cash advance from factoring. A truck factoring company will base your approval on your customers’ credit instead since they’re the ones responsible for paying the invoice.

Choosing an Ideal Truck Factoring Company For You

There are plenty of factoring companies in the market available in varying sizes and functions. It’s important to note that not all factoring companies are the same. You might have to do a bit of research to get the best truck factoring company for your business.

Make sure you consider how they go about providing their services. Ask about their terms fees, and ask them to be clear on if or not they’re any hidden charges.

Does the factor have enough capital resources to grow with you? What are their value-added services? Ensure you work with a company that provides enough flexibility to serve both you and your clients effectively.