3 Reasons Why Trucking Companies Use Freight Factoring
Why do so many trucking and transportation companies include freight factoring as part of their financing toolkit? The business rationale for choosing factoring for trucking is largely based on the ease and convenience of gaining immediate access to cash. With so many operational expenses having to be paid out every day trucks are on the road, trucking company owners are constantly in need of working capital. Factoring for trucking companies provides predictable cash flow by converting invoices into cash within 24 hours. This financial certainty is key to supporting your company’s sustainability through boom periods, economic hardships and everything in between.
Not sure if freight factoring is right for your trucking business? Consider the three main reasons for using this mainstream financial option and measure it against your trucking company’s needs.
1. Finding cash to meet trucking company operating expenses
Next to finding freight and managing drivers, reliable funding is one of the biggest concerns that occupies the minds of trucking company owners. Even the most successful trucking companies go through periods where their outgoing cash requirements exceed cash-on-hand. When you have to invest the manpower and resources upfront to deliver your services, it’s often tough to wait 30-60 days for an invoice to be paid. In the interim, you still need to make payroll, pay for fuel and maintenance, and the dozen other day-to-day expenses needed to keep your trucks rolling.
For many industries, the first option is to approach the bank for a commercial line of credit. However, because it poses so many risk considerations, the trucking industry is considered unstable by the banking system. Even before the coronavirus pandemic disrupted life as we know it, fluctuating freight volumes, roller coaster rates and record insolvencies were common place; the very conditions banks want to avoid. For this reason, most trucking companies are denied qualification for a commercial line of credit. Trucking companies that do manage to secure bank financing find themselves governed by debt covenants that negatively affect their business. These are restrictive terms and conditions that limit the business owner’s ability to make independent financial decisions and stifles the company’s ability to grow.
Freight factoring is completely different:
- Freight factoring is designed exclusively for the trucking industry.
- Qualification is quick and easy for startup companies to large established fleets.
- Funding can start within two days of applying.
- Funding grows as your business grows.
- There are no restrictive loan covenants.
Freight factoring is the ideal solution for smaller or startup trucking companies needing fast, cost-effective funding. For large established fleets, Factoring Line of Credit is the best choice. This highly flexible financing option creates a cash reserve from which funds are accessed as needed.
2. Managing a wide variety of credit terms
Every customer is different and often the payment terms you agree to will vary. If you could convince every client to pay you within 15 days, without exception, accounts receivable management would be easy. However, that simply isn’t the way it works. What results is a cash flow roller coaster that can be difficult to predict and track even if all customers pay within their agreed upon term. When you add to the mix those customers who pay late, the water becomes even muddier.
Factoring your trucking invoices evens out cash flow, making it predictable and immediate. You issue your invoices and receive cash within 24 hours. The factoring company manages your receivables and waits to be paid by your customer. An experienced team of accounts receivable specialists act in a professional and friendly manner to improve collections and maintain positive relationships with your customers. Not only does factoring create immediate cash, it also reduces the administrative time, headaches and costs of chasing after receivables.
3. Handling business growth and transition
Talk to any trucking business owner who has experienced accelerated growth or has gone through a significant business transition and they will tell you that these business stages require unlimited positive cash flow. Exciting as they may be, these are often turbulent times. Traditional financiers, like banks, smell the greatest risk during these business stages and withhold any possibility of financial assistance. Knowing how to wisely grow your trucking business is a puzzle for many owners.
If you haven’t already guessed, factoring is the solution in this situation. Factoring companies take a completely different view of high growth and trucking businesses in transition. Trucking companies stretching to grow are success stories that freight factoring companies willingly support. Companies in transition are realigning their organization to better manage future operations. As long as you deal with creditworthy customers, you can qualify for factoring for the cash needed to finance your trucking company’s growth, or to see it through its time of transition.
The most valuable funding advice anyone can give is to work with a financial provider who knows your business. The best factoring companies are industry-specific financial service providers with specialized products and trained professional staff members who know and understand the industry.
What is Non-Recourse Factoring?
Another option to consider when shopping for invoice factoring is non-recourse factoring. Unlike traditional factoring, in non-recourse factoring, the factor assumes the risk of non-payment by the original debtor. If the debtor doesn’t pay the invoice, the business is not required to repay the factor. This method allows businesses to obtain immediate liquidity without the liability of potential non-payment by their customers. Not all companies that offer non-recourse factoring cover the same liabilities. You can find some things to look out for in our blog Top 11 Things to Understand Before Signing A Non-Recourse Factoring Agreement.
For more information or to start factoring your freight bills and trucking invoices contact us.
Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.
We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.