Invoice factoring is older than you think
The concept of factoring is quite old. Factoring has been around since the ancient Mesopotamian times and the code of Hammurabi. It is a financial practice that many companies use to gain access to cash flow across industries and around the world.
Trucking has been a commercial venture in North America for over a century, and invoice factoring has supported the industry since its early days. As over the road carrier services grew in scale and importance, freight factoring, a specialized form of factoring for trucking companies, evolved. Today, freight factoring is a mainstream financial option for trucking businesses in need of operating capital.
Invoice factoring and trucking have a long history
Trucking was first introduced to North America in the late 1800s. As technology advanced, road systems improved and the distance freight travelled increased. Trucking grew in prominence as the workhorse of the nation’s economy.
Following World War II, expansion and improvement of highway systems in the United States and Canada made it possible for the trucking industry to become a vital part of North America’s supply chain network. With the resulting surge in freight transportation, commercial banks and independent financial firms fully adopted factoring arrangements to suit the needs of trucking companies. A boom in funding transportation companies had begun and freight factoring had a prominent position.
Throughout the ’60s, ’70s and ’80s, the trucking industry continued to evolve as an essential industry. At the same time, partial deregulation of the industry resulted in dramatically increasing the number of trucking companies in operation. Increased competition played havoc with volumes and freight rates. At the same time, rising interest rates began to challenge trucking companies’ ability to secure financial backing.
As the decades continued to unfold, the trucking industry experienced the roller coaster ride of wild swings in year over year trends. This past decade has been very difficult. Trucking companies struggled through five years of long slow recovery following the 2008/2009 Great Recession. Strong gains in 2014/15 were quickly diminished by weak volumes in 2016 before rebounding again in 2017. The 2019 blood bath in rates preceded the disastrous 2020 pandemic.
Now we are experiencing a spike in freight volumes as the supply chain struggles to find its new normal. Through all this volatility, freight factoring continues to grow as a leading financial strategy for transportation businesses.
Invoice factoring is an ideal funding option for trucking
With far less credit limitations, invoice factoring provided a distinct advantage over the restrictive covenants of a banking line of credit. Easier qualification, fast funding and value-added support services produced the ideal funding solution for new and growing transportation companies. These features continue to propel invoice factoring even further forward as a viable cash flow solution, increasing its popularity as a form of business financing.
One of the greatest advantages and most attractive features of contemporary invoice factoring is the continuous level of cash flow it generates. Because increased funding is triggered by new invoices, the factoring system provides easy access to working capital that automatically adjusts to the company’s unique rate of business growth. Invoice factoring is a form of accounts receivable funding, the only financial mechanism directly linked to a company’s sales. The more invoices a company generates, the more access it has to immediate cash.
A vast number of businesses spanning numerous industries depend on accounts receivable financing to support operations and fuel growth. As banks continue to deny funding to transportation businesses, the trucking industry becomes increasingly reliant on this flexible funding solution.
Invoice factoring isn’t a new financing product
The practice of invoice factoring dates as far back as 4,000 years to the Mesopotamia Empire. Later, the Romans adopted a similar financial structure by selling promissory notes at discounted prices. As Europe evolved and commerce began to thrive, invoice factoring was widely adopted in the textile, import/export and manufacturing industries. Factoring was first introduced to the Americas around 1620 when the Pilgrims began to colonize North America. As the colonies developed, factoring took its place as a prime source of financing.
A cotton grower in 18th century America typically sold their product to England and France. The cotton had to be grown, harvested, warehoused then shipped by sea to the European buyer. Payment would then have to make the long sea voyage back until it finally made it into the hands of the grower.
If you think 30 to 60 days is a long time to wait for payment, imagine the difficulties a plantation owner would face having to wait months for compensation! During those days, invoice factoring delivered an essential means of providing cash advances to the producer, finance the credit extended to the buyer and insure the credit strength of that buyer.
In today’s financing world, factors provide an equally significant role in the movement of freight. Due to the daily capital investment needed to keep equipment moving, trucking companies require a steady and reliable cash flow solution. Banks are naturally inclined not to lend to small business, especially if it’s in the transportation space. As the industry is plagued by numerous challenges, including slim margins and slow paying customers, banks are characteristically reluctant to qualify transportation companies for sufficient credit. For this reason, invoice factoring remains a primary source of funding to the trucking industry.
The future of invoice factoring
Invoice factoring has evolved over the centuries, yet remains relatively similar to its original form. The success of this financial arrangement is based on the expediting of payment on revenue already generated. Factoring isn’t a loan, instead, it is the selling of your invoice receivables at a discount in exchange for immediate cash. This simple financial structure holds numerous benefits that favors the business owner:
- Immediate payment on account receivables due
- Professional accounts receivable management is included with the service
- No financial ceiling; the more invoices you generate, the more funds you receive
Invoice factoring has been around for centuries and will continue to provide financial support to the trucking industry for many more years to come. As trucking is now a significant niche market within the factoring space, industry specific factoring companies have emerged providing specialized services to trucking companies of all sizes. These industry specialists offer the most competitive rates, cash advances on loads in transit, equipment financing and discount fuel programs. As long as there are commercial trucks on the road to deliver freight and generate invoices, these specialized factoring companies will continue to service the industry.