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How Factoring Helps Assess Credit Risk & Improve Cash Flow

By 01.06.21November 29th, 2021No Comments
How Factoring Helps Assess Credit Risk & Improve Cash Flow

Providing payment terms to customers is common practice in the trucking industry. Failure to do so will undoubtedly lead to a dramatic loss of business. Shippers expect at least net 30 and are inclined to want more. During trucking’s recent boom years of 2017 and 2018 when capacity was low and freight rates were high, big shippers began to push back against the rising cost of transportation with demands for even longer credit terms.

Your trucking company is extending credit every time you take on a load and issue an invoice with payment terms. Terms, such as net 30, are a form of short-term credit by which trucking companies extend time, interest free, for the payment of freight bills. This is a great tactic for staying competitive, but it must be supported by strong healthy cash flow in order to be a successful long-term strategy. Avoiding bad debt and maintaining positive cash flow is of the utmost importance. This is where a freight factoring company can be of tremendous help with credit risk assessment and cash flow solutions.

Managing your trucking company’s credit risk

Unfortunately, the trucking industry is well known for having customers that stretch out payments as a common business practice. Taking on new clients and freight from load boards without proper due diligence can catch up with you and leave your trucking company in a difficult position. The following example illustrates this point;

The Opportunity:  XYZ Trucking has just secured a new customer that will keep three trucks on the road each week with long haul to Los Angeles, California. A steady demand for fresh produce covers the back haul. This is an excellent opportunity for any trucking company. XYZ Trucking assigns its best equipment and drivers to the lane committing all resources to ensure the reliable and safe delivery of each load.

The Problem: For the next three months, deliveries are made, invoices are issued and drivers are paid from the company’s cash reserves. The challenge is the new customer has yet to pay any of its invoices, resulting in a major cash flow shortage. The issue is not that the new customer will not pay, they are just notoriously slow payers despite XYZ’s ongoing efforts to collect.

The Solution: Make informed decisions — know who you are hauling for before you pick up freight. Perform both upfront and ongoing credit checks using easily accessible and relevant information.

How to assess credit risk of a company

Late payments, invoice disputes and non-payment list high as the accounting nightmares that keep truck company owners awake at night. To minimize the stress, take precautions prior to committing to new business and evaluate the customer’s credit worthiness.

Credit Applications and References

When taking on new customers, it is highly recommended to collect credit applications and references to verify the customer’s payment history and ability to pay. Make sure you follow up and call the references to confirm information. If your customer has trouble providing these references, it may be an early sign that the company has a poor credit history.

Credit Search Tool

With the coronavirus crisis, too many companies were facing the threat of insolvency. Add in the ongoing hazards of hauling for unknown customers who post freight on load boards, and you have a minefield full of credit risk to manage. The most effective way to expose credit risk is to run credit searches prior to hauling loads. There are several fee-based options available providing different information at varying costs. Select a service that best meets your needs and budget.

Freight factoring companies provide free credit checks

The best credit search tools for trucking are free! One of the many advantages of working with an established factoring company for trucking includes access to their database of credit information on shippers and brokers. eCapital, a leading invoice factoring company for the trucking industry, have amassed thousands of businesses in their database. The information is constantly growing and updating. Conduct unlimited searches free of charge using their online credit search tool to view the potential customer’s payment history, their ability to pay and the business credit rating.

Invoice factoring improves cash flow

To keep hauling while providing credit terms to customers, your trucking company needs steady reliable cash flow. But how do you achieve healthy positive cash flow when trucking customers are typically slow to pay and non-payment is always a threat?

Invoice factoring companies convert invoice receivables into immediate cash within 24 hours. Freight factoring is a specialized form of invoice factoring designed specifically for the trucking industry. It is now considered a mainstream financial strategy to ensure steady reliable funding for transportation companies that work with slow paying customers. Freight factoring companies like eCapital pay invoices fast, or even in advance of issuing an invoice.

Why is freight factoring good for trucking companies?

The chase for freight is so urgent, especially on the backhaul, that trucking companies grab the first available load that fits their itinerary with little to no due diligence and no security. The customer’s ability to pay is rarely considered prior to accepting the load. The result is higher incidence of non-payment and unpredictable cash flow. This is where the risk factor increases substantially, often threatening the trucking company’s ability to support sustainable growth.

Freight factoring solves all these problems with:

  • cost-free credit analysis
  • risk mitigating tools and advice
  • professional collection services included
  • invoices paid in hours, not days or months

Ongoing protection

Getting paid for freight delivered is the whole purpose of your trucking company, make sure you minimize risk with ongoing protection. Gathering information and tracking your customers credit rating is not just something you do at the onset of a relationship. Ongoing monitoring will alert you of potential problems that may affect your customer’s ability to pay and help you avoid getting burned. In the wake of the coronavirus pandemic, this is truer today than ever.

To learn more on how a factoring company can help reduce risk and improve your cash flow, contact eCapital today.