For trucking companies, operational interruption can have serious negative impact on customer relations and your bottom line. Having preventative programs in place to avoid disruption is a key strategy to ensure the success of your trucking company. Just like regular maintenance ensures the reliability of your working equipment, invoice factoring ensures reliable cash flow and access to working capital to support operations. This article is intended to explain the difference between spot factoring vs contract factoring and which is better for your trucking business.
Maintaining reliable cash flow is one of the most frustrating, and often problematic aspects of operating a trucking business. Your customers are demanding, expecting fast on-time delivery of their shipment. The problem lies in the fact that too many customers don’t respond in kind – they are slow to pay for the service you provide. The average time for freight bills to get paid is almost 40 days, some shippers are making strategic changes to implement even longer payment policies. This practice of delayed payment plays havoc with carriers’ and brokers’ cash flow, seriously endangering their ability to fund uninterrupted freight carrying service. To rub salt into the wound, any failure to deliver on time, no matter the cause is reason enough for a demanding customer to terminate a service agreement and switch to a competing carrier. Extreme weather, driver failure, mechanical breakdown and cash flow interruptions are the likely causes of service failure.
How does invoice factoring improve cash flow?
Invoice factoring is the practice of selling invoice receivables (freight bills) at a discount in exchange for immediate payment. This provides improved cash flow ensuring payment for a delivery is received in time to pay for the operating expenses associated with the next day’s haul. To make certain this flow of incoming cash is consistent and outpaces the flow of outgoing expenses, factoring companies that specialize in trucking provide freight factoring, a specific form of contract factoring.
What is spot factoring vs. contract factoring?
Invoice factoring is a general term that classifies various forms of accounts receivable financing under one umbrella. These many derivations have evolved and are tailored to service the needs of specific industries. The products and services available are wide ranging and varied but can be categorized and separated by distinct types. For trucking companies, one of the main types of factoring to consider is spot vs. contract factoring.
Spot factoring: Used by businesses to sell an individual invoice at a discount in order to receive immediate payment for that particular invoice. It is an option, not an obligation. Businesses are able to pick and choose which invoices they would like to have funded. Once a factoring arrangement is in place, a business can factor invoices as often or as little as needed to maintain positive cash flow. There are no long-term contracts and no monthly minimums, so an arrangement of this nature is a very flexible form of funding.
The downside of spot factoring is that it is a more expensive option than contract factoring and does not give you continuous cash flow nor the multitude of support services designed specifically for trucking companies. It also provides a lower advance rate and a higher factoring rate than contract factoring. Another downside to spot factoring is that it typically only works on large invoices in order to be worth the factoring company’s time and effort. As freight bills are generally considered small compared to other industry invoices, individual invoices from a trucking company usually do not qualify for spot factoring. Generally speaking, spot factoring is best suited for industries with large projects, such as a construction company.
Contract factoring: Used by businesses to create positive cash flow and maintain regular funding through the peaks and valleys of seasonal fluctuation and market demand. It is an arrangement where a business factors the majority of their invoices for a specified term.
Trucking is a volatile industry with huge, often unpredictable changes in freight demand and capacity. This dramatic swing in demand causes a roller coaster effect in cash flow. The result is tremendous stress placed on a trucking company’s ability to meet expense payments on time and fund the daily over-the-road expenses need to keep equipment moving. With the continuing presence of the coronavirus pandemic, 2021 is a transitional year of unpredictable outcomes. Having a reliable form of financing that adjusts to changing conditions is a huge competitive edge for trucking companies.
Freight factoring is a specific form of contract factoring designed exclusively for the transportation industry. The benefits are vast compared to spot factoring. For trucking companies these include:
- Significantly lower factoring rates to improve profitability.
- High advance rates – more of your money in your hands when you need it.
- Fast funding – within 24 hours of submitting an invoice.
- Easy qualification – if your customer base is credit worthy, the process is quick and simple.
- Risk mitigating tools and advice – avoid hauling for customers with poor payment history.
- Fuel cards, and other cost-saving services.
Why choose a freight factoring company?
Trucking is a unique business needing road experience, good managerial skills and continuous funding to operate it well. Because it is a capital intense industry, reliable funding ranks high as a daily concern for many owners of trucking companies. After all, if there are no funds available to pay drivers or put fuel in the tank, your truck(s) will be left idle with places to go but no means to get there. To succeed, truck company owners need a dependable source of funding that provides easy access to working capital when it is most needed – every day!
Freight factoring companies are specialists in transportation financing. They understand your business – how it works, the challenges you face every day, and the need for convenient, reliable funding that’s easy to manage. The products and services provided by these specialized factoring companies for trucking are designed for the seamless provision of reliable funding, cost effectively and without hassle.
When you partner with a freight factoring company, you get the backing of several professional teams to support your business. An industry experienced accounts receivable team manages collections courteously to protect your company’s customer relations while maximizing efficiency. A credit department is on hand to guide you through risk management and help protect your company against bad debt (customers who won’t pay). A dedicated Account Manager is assigned to your company to coordinate team activities on your account, streamline processes and ensure ease of use. To further support managing your business, freight factoring companies provide a bucket full of extra tools, information and additional services. These include:
- Credit Check Tool: Cost-free online tool for unlimited credit checks on customers’ ability to pay.
- Cost-Per-Mile Calculator: Perform regular calculations to ensure your company is performing profitably.
- Profit and Loss Calculator: Easily calculate your profit and loss margin on every load.
- Truckers’ Hub: Find all the resources that truck company owners need to grow your trucking business.
- KPIs: Know the key performance indicators to monitor your company’s performance.
- Information Blogs: Advice, tips and insights to help your business succeed.
Additional Support Services:
- Cost-Saving Services: Save big with fuel cards and a list of industry suppliers providing discount pricing.
- Fuel Advances: Get paid before you deliver to cover over-the-road expenses.
Spot factoring may seem the ideal funding solution to those first investigating this alternative form of financing. However, for owners of trucking companies it has severe limitations that eliminates it as a viable means to improve cash flow. Because of its singular nature, spot factoring does not create steady cash flow. It is designed to quickly access big amounts of cash based on large outstanding invoice receivables. For construction companies or staffing agencies, it is an excellent option to move onto the next phase of a project or gear up for a new contract. Trucking companies face a different set of conditions and therefore need a different funding solution. High daily operating expenses demand the need to access working capital on a regular basis. Freight factoring was designed specifically to meet this need.
For trucking companies looking to finance growth, contract factoring is by far the better option. Over the past few decades, it has become harder and harder to access a business loan or line of credit from the bank. In contrast, freight factoring companies have made it easier to qualify for financing and have expedited the process to allow for first funding within a few days of receiving an application. The biggest benefit is that funding limits grow as your business grows – the more invoices you generate, the more funding becomes available.
For more information about freight factoring, visit eCapital.com