5 Ways Freight Factoring Can Improve Your Trucking Company's Credit Score
Like any business, owner-operators, fleets, and freight brokers need working capital to keep their trucking company running. Funds are required daily for fuel, food, truck maintenance, fleet growth, and for freight brokers to pay carriers.
It is not always possible to have cash on hand, which leaves leasing options for new equipment and loans or credit as the last option for large purchases. Your credit score will affect whether you are approved for a lease or loan and what interest rate you’ll pay.
Trucking companies with low credit scores will face higher leasing payments and have difficulty finding lenders who will finance them. Freight factoring is an easy-to-manage financial strategy to help build your credit score as it improves your company’s cash flow. Freight factoring is a 24-hour cash payment solution that converts invoices into immediate cash. It is available to most trucking companies, even those with low credit scores. Here are 5 ways that freight factoring can improve your credit score:
1. Avoid Cash Shortages
Cash shortages lead to delayed payments, significantly contributing to low credit scores. Cash shortages are also highly detrimental to your business’s reputation. Internally, it can lead to unrest amongst your employees if wages become overdue. Externally, vendors and customers lose trust in your business’s operations if late or underpaid remittance payments become the norm. Freight factoring improves cash flow allowing your trucking company to meet financial obligations on time. Routinely meeting payments on time is a prerequisite to enhancing your company’s credit score.
2. Working Capital Access
Scoring models typically view a loan application as potentially increasing your risk as a borrower. That means your application, whether approved or not, can negatively affect your credit score. If you apply for a business loan or line of credit to access working capital, the inquiry can hurt your credit score even if you aren’t approved.
Factoring differs from traditional financing as it doesn’t require a check of your business credit score. Instead, qualification is based on your customers’ credit score allowing your trucking company to leverage its good standing to improve your access to working capital.
In other words, factoring your invoices gives you the capital you need to grow your business without hurting your credit score.
3. Repaying Debt
The immediate payment of invoices that freight factoring provides creates reliable cash flow, allowing debt payments to be made on time or in advance. Without freight factoring, trucking companies often wait up to 90 days for customers to pay their invoices. The resulting cash flow gaps mean any available credit, such as credit cards are usually tapped into as a regular spending source and repayment schedules are often missed.
Paying debts on time is essential to building a higher credit score – cash on hand from freight factoring makes this more achievable.
4. Rebuilding Credibility
Increasing your credit score and building financial credibility is easier when you factor invoices.
Lender’s view clients with a history of late payments and excessive debt as less likely to repay their loans. Regular on-time payments and debt reductions achieved through the benefits of freight factoring lower the lender’s risk, increasing the likelihood of partnership.
With your reputation and credit score repaired from using freight factoring, rebuilding your company’s credibility is more assured. These achievements will facilitate access to loans that can be used to grow fleets and, over time, your trucking business.
5. Easier Access to Credit to Get You Started
The best factoring companies that offer freight factoring understand the trucking industry inside and out. While underwriting, freight factoring companies will focus on easy qualification requirements designed for trucking companies but not typically considered by conventional lenders.
For example, factoring companies assess the credit strength of your customers rather than your trucking company’s credit score. Also, as long as your trucking company is incorporated, it’s considered a separate entity. Poor personal credit wouldn’t impact your chances of opening a factoring account as significantly as it would of accessing a bank loan.
Companies that provide freight factoring to trucking businesses with impaired financial histories have plenty of experience solving complex or challenging financial situations. This experience, coupled with flexible funding terms, affords the best factors to lessen the restrictions on opening a factoring account – a game-changer and often a business-saver for trucking companies.
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.
With regular cash flow and financial stability, freight factoring helps trucking companies pay bills on time, pay down debt more regularly, and build credibility. Used effectively, owner-operators, fleets and freight brokers that embrace freight factoring to improve cash flow can gain the additional benefit of strengthening your trucking company’s credit score.
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