How Working Capital Can Challenge Trucking Companies

eCapital Corp

Last Modified : Jan 23, 2024

A company’s working capital is a core part of funding its daily operations. Despite the extreme importance of over-the-road services, freight carriers and brokers continue to experience difficulty in meeting the working capital demands of the industry as banks remain reluctant to fund trucking companies. The outbreak of the COVID-19 pandemic has brought global attention to what we in the industry already know – trucking is an essential service and the work horse of the supply chain.  As the vaccine rollout continues, it is now more important than ever for trucking companies to keep supplies moving and deliver essential goods. Solving this working capital dilemma is of national importance to support the fight against the pandemic and to strengthen the supply chain. So, what are the possible funding solutions for undercapitalized freight carriers? Recent trends are showing a significant shift toward freight factoring as a preferred cash flow solution and to gain immediate access to working capital.

Why is working capital so important?

Working capital is the difference between a company’s current assets and current liabilities. In short, It represents the amount of money available to pay short-term financial obligations. For trucking companies, these short-term obligations occur every day your truck(s) are on the road incurring costs.

A leading reason for companies to fail is the lack of sufficient funds available to operate the business over an extended period of time. A company may be profitable on paper, but if revenue is not collected fast enough and in regular fashion it will accumulate debt in an attempt to pay bills on time. This accumulation becomes a heavy burden that overshadows and begins to eat into net profit. If not corrected, the trucking company will become unable to fund operations and be forced to park its equipment until a financial solution is created. By this time, clients will have found other carriers to fulfil the service obligations your trucking company failed to meet – at that point it’s game over.

Although having working capital to support operations is essential, being able to easily access it when needed is far more important. This is why positive cash flow is critical. Positive cash flow is when cash flows into the company faster than it flows out. The problem is industry wide – bills need to be paid every day but customers take over 30 days (often much, much longer) to pay on invoices. Without a cash flow strategy, trucking companies are most likely to hit a financial wall when bills cannot be paid in time and operations fail. Planning ahead to prevent hitting this wall is one of the key strategies needed to ensure success of your trucking company.

Why banks are not the solution

The biggest problem is that commercial banks are no longer a viable option. Banks are extremely risk averse and profit motivated. Small businesses, especially trucking companies are considered volatile and therefore high risk. Banks prefer to lend to corporate clients who are more stable and take less work to manage their larger loans, thus making them far more profitable. Few banks will even consider a credit line application from a transportation company before they reject it. The next possible option is to find a private investor to back your business and ensure you have the cash flow needed to support operations. Again, unless you have a history of solid business that shows consistent profits, a plan for future growth and a good credit rating, few investors will step forward to offer financial assistance.

Freight factoring is the preferred solution

Due to the powerful leveraging effect of converting invoices into immediate cash, freight factoring has evolved to become a mainstream financial solution for trucking companies. By collecting on invoices directly after they have been issued, freight carriers are in a position to immediately turn the revenues earned from one delivery into supporting operations for the next. This creates a positive cash flow experience that allows trucking companies to expand services as fast as new clients and more freight can be booked.

Benefits of freight factoring

The best thing about freight factoring is that it is easy to qualify for and first funding can start within a few days of applying. But before we get into the ease of use and its benefits, let’s take a look at how it developed as the preferred option for so many truck company owners.

Invoice factoring is one of the oldest forms of business transactions to support trade. This centuries-old practice was first developed by the Mesopotamians around 3,000 BC, used extensively by the Romans as their empire expanded and became a common practice in Europe to support colonial trade. Factoring for trucking was introduced back in the early days of the industry, and its usage has grown ever since. However, a surge in its popularity occurred around the same time banks restricted credit to trucking companies making room for alternative lenders to fill the gap. A select number of these non-bank lenders specialized in factoring for transportation and evolved invoice factoring into a highly specialized form of financing designed specifically for trucking companies. Now, freight factoring provides much more than just converting invoice receivables into cash within 24 hours. It also provides:

• free credit check tools
• back office support and collection services
• cost-saving service such as fuel discount programs

Truck company owners, fleet managers and controllers have come to depend on the convenient use of freight factoring to efficiently deposit cash directly into their account within 24 hours of delivering a load and invoicing the client. A dedicated account manager, collection specialists and a robust 24/7 online client portal are available to ensure a streamlined user experience. This fast, convenient and seamless financial service provides instant positive cash flow with full transparency allowing company owners to concentrate on servicing clients, not chasing them for payment.

Qualifying for freight factoring is easy

For any size trucking company in any stage of development, freight factoring is the ideal funding solution to provide instant access to working capital.

Startups: Because qualification is based on the credit worthiness of the trucking company’s customers, not the trucking company itself, startup companies with no credit history are eligible. As long as the new company services clients with good credit, their invoices will be paid within 24 hours.

Growing Companies: factoring pays up to 95% of the invoice face value in advance, minus a small fee. The remaining percentage is held as a reserve until the customer pays the invoice in full at which time the balance is released to the trucking company. This occurs on each and every invoice submitted and verified for funding. In other words, the more invoices you generate to credit worthy customers, the more funding you’ll receive. This is ideal for growing trucking companies to expand operations and take on new clients, new lanes and more loads.

Companies in Transition: Changing ownership, taking on new partners or refinancing due to a bank recalling its loan is a particularly difficult time for trucking companies. Freight factoring companies understand your business – they know the challenges you face and the obstacles you need to overcome. An experienced and reputable factoring company for trucking will work with you, your bank, a new partner or new owner to facilitate an easy transition to keep your trucks moving as the financial details are worked out in the background. Being experienced in both transportation and banking, freight factoring companies are the ideal agent to ensure a smooth transition in timely fashion to meet difficult timelines and funding requirements.

Having available funds to meet operational demands is one of the top-of-mind concerns that occupy the thoughts of busy truck company owners. Having a freight factoring facility creates a regular and dependable source of funding, providing easy access to working capital. For a growing number of truck company owners, it’s the only way to go for efficient, yet easy to manage control of working capital needs.

For more information about how freight factoring can simplify your working capital needs, visit www.eCapital.com.

eCapital Corp

eCapital Corp. is committed to supporting small and middle-market companies in the United States, Canada, and the UK by accelerating their access to capital through financial solutions like invoice factoring, factoring lines of credit, asset-based lending and equipment refinancing. Headquartered in Miami, Florida, eCapital is an innovative leader in providing flexible, customized cash flow to businesses. For more information about eCapital, visit eCapital.com.