The trucking industry is all about being on the move, transporting products safely across the country, and getting to destinations on time. Despite customers’ high demand for timely service, it’s ironic that many of these customers regularly pay their invoices well past the due date. According to a recent survey, it is part of a growing national trend – 49% of the invoices produced by businesses in the US become overdue.
For trucking companies, delayed customer payments have a potentially devastating effect – creating gaps in cash flow and limiting access to working capital. In an intense capital industry where accessible working capital is necessary to support ongoing operations, delayed payments cause two very draining scenarios:
- Poor cash flow impedes operations
- Delayed payments divert time and energy away from the business of running trucks
In this article, we speak with Jesse Nicholson, Director of Collections at eCapital. Jesse provides insights and recommendations to trucking companies to help alleviate the challenge of collecting payments on time and cost-effectively.
Delayed payments are common in all industries but are particularly hard on trucking companies due to the heavy burden of high operating costs. Gaps in cash flow can ground trucking operations until funds become available again. Any disruption to operations jeopardizes a trucking company’s revenue streams, service reputation, and survival. Even large fleets can suffer badly from financial stress – Celadon, the nation’s 18th largest TL carrier in 2019 with $706 million in revenue, suddenly ceased operations, creating the largest TL bankruptcy in history. Over 3,000 trucking companies filed for bankruptcy in 2020. And more broadly speaking, 82% of small and medium-sized businesses fail due to poor cash flow.
The Traditional Solutions
There are three traditional ways trucking companies deal with collections. Each comes with significant time and cost challenges:
- Many fleets have an accounts receivable department to manage collections. However, the costs associated with these activities can be excessive. They include general operational expenses, management commitments, office space, and benefits. And in the best-case scenario, days’ sales outstanding are reduced, but you still carry the fixed costs of the resource.
- A trucking company may choose to hire a collection agency that will chase payment on their behalf. In this scenario, the direct costs associated with the service are often excessive, with flat fees ranging from 25% to 50%. While a company might get its payment, high fees could significantly affect cash flow.
- Some trucking companies will write off uncollected payments as bad debt to avoid these collection costs and pain points. While this can provide a tax break, most companies prefer to collect all invoice receivable payments to pay their employees and fuel trucks and remain in business.
The Emerging Solution: Freight Factoring
An increasing number of trucking companies are choosing to work with freight factoring companies to manage their collections while gaining immediate access to the working capital that was previously buried in uncollected invoices.
Why work with a freight factoring company
Recent research indicates that efficient management of accounts receivables (collections) is considered a significant benefit by many users of freight factoring.
Here’s how freight factoring works: Unlike a collections agency, a factoring company buys the receivables from a trucking company. The trucking company immediately receives advanced payment (up to 100% of the invoice face value, minus a small fee). And from that point forward, it no longer needs to worry about chasing clients for payment. The factoring company then works with the trucking customers to manage collections. When an invoice is paid in full, any remaining balance due to the trucking company is transferred. Suppose the trucking company has chosen recourse factoring (the most common form featuring lower factoring fees). In that case, the invoice must be paid within the recourse period (typically 90 days), or the trucking company must buy back the invoice. However, as factoring company collection teams are highly skilled and professional, very few invoices remain uncollected at the end of the recourse period. In this model, the factoring fee is the cost of advancing payment, while the significant benefit of collections and accounts receivable management is provided as a value-added service.
Highly skilled and professional: Nicholson recommends working with freight factoring collection teams – they are highly proficient at what they do. “Working exclusively for transportation clients, these teams understand the industry. Skilled in communicating effectively and professionally with debtors, these teams work diligently to reduce days sales outstanding while protecting relations with trucking company customers.”
Nicholson says his team is trained to be experts in navigating touch points between trucking companies, clients, and brokers. “We leverage our relationships with each of the different stakeholders along the way to expedite and streamline payment and make sure the relationships function in a way that is favorable to everyone involved.”
Those touchpoints include maintaining open communication and providing updates to everyone involved. “We want to identify issues and resolve them expediently to prevent those invoices from hitting a certain age and negatively impact funding for our clients,” Nicholson explained.
The role of credit checks: When dealing with a freight factor, a client that doesn’t pay or cannot pay is rare because the factoring company will have thoroughly vetted the trucking company’s customers for creditworthiness. Credit checking is another value-added benefit of factoring in helping keep your customer list in good order.
Dispute resolution: It’s the nature of business – issues may pop up during the constant interactions between shippers, brokers, and carriers. Deliveries may be late, cargo may be damaged, freight rates may be in dispute, or payment may simply be delayed. These are also some of the issues that drain a busy trucking company’s time and resources if they manage collections independently. Freight factoring collection teams are trained to handle these issues professionally, often providing an avenue to attain an agreeable resolution and minimize the impact on the trucking company. “It centers around good communication with our clients and their customers early and as often as needed.” continued Nicholson. “With effective communication, we can hopefully get issues resolved as early in the invoice lifecycle as possible to prevent them from aging and potentially impacting the trucking company’s funding.”
Jesse Nicholson states that in many cases, part of the reason why a payment may be delayed is because of the paperwork. “Paperwork authentication is not necessarily streamlined,” he explains. “No invoice confirmations are identical. So, if you’re a company that deals with multiple brokers and their paperwork, which can be different, it can be a little bit difficult to navigate.” Nicholson continues, “We have a post-purchase verification department that is well versed in all styles and formats of invoicing and supporting documentation. Our team works very hard to confirm deliveries, verify invoices and ensure the rates are correct as quickly as possible to expedite funding.”
When dealing with other issues, such as damaged freight or delayed deliveries, a freight factoring professional collections team will act to facilitate resolution. The collection team’s job is to ensure transparency and guide the correspondence toward a successful solution by streamlining communications between the trucking company and its customer. As a result, Nicholson’s team boasts a high success rate in bringing such disputes to a favorable outcome.
Most operators get in the business because they understand freight – how to find it, move it, and make money in the process. Very few operators properly consider the effects of slow-paying customers until they feel the pains of poor cash flow and the aggravations of bill collecting. But there is a solution, and with the help of a proven freight factoring company, you can avoid this pitfall. Working with a freight factoring company will expedite your cash flow, provide accounts receivable management, and significantly reduce bad debts. According to Jesse Nicholson, freight factoring could be the solution you’ve been looking for to avoid chasing customers for collections.
Our mission is to empower our trucking clients to keep up with their businesses by accelerating their access to cash flow. eCapital makes the lives of trucking company owners easier by turning the wait and worry of unpaid invoices into the ease and advantage of immediate cash. Our services are designed to support your trucking company’s growth and profitability. We provide complete control of your capital management, access to more funds than any other lender can provide, fuel discount programs, other profit-enhancing services, and accounts receivable management.
For more information about how we can help grow your trucking business, visit eCapital.com