The trucking industry is volatile by nature – how well your trucking company is prepared to ride wild swings in demand, rates, rising fuel costs and numerous other fluctuating trends will determine the success or failure of your transportation company. Creating steady cash flow is crucial to building stability in chaotic market conditions, including an industry market flip. Partnering with a freight factoring company to ensure reliable funding, manage accounts receivable more effectively and to help reduce operating expenses is an excellent strategy to gain the foundational strength needed to survive changeable market conditions.
Global supply chains have been disrupted beyond imagination over the past year as the pandemic forced shutdowns worldwide, the Suez Canal was rendered impassable for nearly a week, a new shipping container shortage emerged and surges in e-commerce created spikes in last mile delivery. As the vaccine roll-outs continue across the United States and Canada, the economy is showing signs of rapid recovery. This rebound is creating huge consumer demand and in many sectors an industry market flip, placing additional stress on supply chains.
Carriers and brokers are enjoying the benefits of record high spot market trends which peaked in Q4 2020 and dipped only slightly in Q1 2021. As per historical norms, contract rates are trailing the heated spot market by several months and are expected to hit record highs later this year. Now is the time to reap the rewards of high demand and rates, but as always, be prepared for the downside of the curve.
State of the economy
The industry outlook is good, very good! For the second quarter in a row, consumer spending rose in Q1 2021 as it heads back to pre-pandemic levels. As overall sales increased, inventory levels have been depleted. Shippers are now ramping up production to restock shelves creating further demand on capacity, which continues to trend upward. To gauge the health of over-the-road freight transportation, the two main indicators to monitor are fuel rates and Class 8 truck purchases.
The cost of fuel: Rising fuel costs are reaching pre-pandemic levels and are expected to remain high through at least Q3. Oil production will increase globally to balance low inventory levels with the pace of consumption. Rising fuel costs are not expected to slow down until 2022 when production is anticipated to outpace decelerating oil consumption. Freight carriers need a robust fuel cost management program to minimize this expense which represents well over 30% of your operating costs.
Class 8 truck orders: The truck companies that had the resilience to survive the market conditions of the pandemic and prosper from the back end of 2020 are now gearing up for the long recovery that we all hope has begun. Class 8 orders surged to 43,800 in February 2021, a 212% increase compared to a year earlier. This industry market flip illustrates the positive outlook for a lengthy period of high demand for capacity. Market conditions are ideal for carriers to push for growth, extend their fleet capacity and increase profitability. Taking on new equipment and expanding operations requires steady cash flow to meet ongoing expenses and rising fuel costs. Freight factoring is the ideal funding solution for trucking companies to access the working capital they need to sustain growth and enhance profitability.
Preparing for growth
The extreme rise of the spot market will peak (which it probably already has) and give way to more loads being moved by contract. This is where trucking companies that have positioned themselves for growth will benefit the most. Those that have grown operations will reap huge rewards as shippers wanting to sign contracts reach out to trucking companies with the capacity to haul higher volumes of goods at competitive rates.
The challenges to sustain growth can be over burdensome to many trucking companies that are not well structured. One of the key difficulties is to remain flexible as operations grow and market conditions change. Today’s market is like a desert storm – conditions are hot and the sand is shifting below your feet at all times. Being able to change directions as the prevailing winds change is key to surviving long term. A flexible financial strategy is needed to support the ever changing market conditions of the post-pandemic era.
As the new normal unveils changing consumer habits, shippers are adjusting to meet new demands. Shippers are forced to change products, switch lanes, adapt new shipping frequencies and even change destination locations. Freight carriers need to have the ability to react quickly and efficiently to the changing needs of their customers. Trucking companies with the equipment to meet capacity, an organization structured to manage shifting priorities and the financial flexibility to respond to new opportunities are expected to profit well into 2022 and beyond.
Benefits of freight factoring
Having available capacity is a logistical problem solved by the acquisition of more equipment and drivers. Organizational challenges to develop a culture of great customer service through changing market conditions is a management concern. Financial flexibility to support growth is a matter of finding the right cash flow solution to gain immediate access to working capital when it’s needed. Freight factoring is the ideal funding solution for growing trucking companies.
Immediate access to working capital: invoices are converted to cash within 24 hours and deposited directly into your account for convenient access to fast cash. As long as your trucks deliver freight to credit worthy customers, your trucking company will have readily available operating cash to support ongoing operations, pay bills and meet payroll.
Factoring does not incur debt: Freight factoring is not a loan – it does not incur debt, nor require regular payments. Instead, it is the selling of invoice receivables at a discount in order to receive immediate payment, usually within the same day. Factoring is simply a means to accelerate cash flow and gain immediate access to money your company has already earned. Freight factoring provides greater financial control by removing the waiting game of 30 days, 60 days or longer for slow paying customers to settle their payments. Knowing your trucks produce cash in hand hours after delivery has been made allows the freedom to plan and execute on growth initiatives.
Funding grows as your business grows: Factoring is the only funding solution tied to sales – the more invoices your company generates, the more funding becomes available. Each load delivered and invoiced converts to fast cash deposited within 24 hours. This creates the positive cash flow needed to sustain growth. With no regular payments due or debt to service, freight factoring allows trucking companies to expand or contract services as needed to meet changing market conditions.
Cost-free accounts receivable management: Your core business is to haul freight – chasing customers for payment is a distraction that is best left to professionals to manage. Freight factoring companies provide cost free A/R management to improve collections. A team of professionals, experienced in trucking and trained to handle your customers with courtesy, enhance collection efforts. Now trucking companies are free to concentrate on servicing customers, not chasing them for payments.
Enhanced profitability: A reputable freight factoring company will provide a robust fuel cost management system to reduce cost and manage expenditures. Fuel discount cards allow trucking companies to fuel now, pay later with delayed payment terms and benefit from significant discounts off the cash price at nationwide truck stops. When combined with freight factoring, trucking companies collect payment in advance of having to settle fuel bills. This solves one of the biggest cash flow problems trucking companies face, plus provides the transparency and documentation capabilities needed to prepare for easy tax reporting.
Ride the wave of economic recovery
The trucking industry is in unprecedented times. Even the spikes that occurred during the aftermath of the 2014 Polar Vortex, or the 2018 back-to-back hurricanes of Harvey and Irma cannot compare to the activity now being witnessed in freight transportation. Never has the landscape changed so dramatically and so quickly as during the COVID crisis and the post-pandemic era which we now find ourselves in. For an industry known for its volatility, this is a new level of disruption and recovery unlike ever before. Anticipation runs high as the industry prepares to ride the wave of economic recovery well into the next year. However, riding the wave means being prepared and well positioned to manage opportunity as it arises. To this end, a greater number of trucking companies are turning to the benefits of freight factoring to gain the flexible funding solution needed to support growth.
Choose the right factoring company for your business
Freight factoring is a specific form of invoice factoring designed exclusively for the trucking industry. Only financial lenders with a background in transportation have the experience and organizational structure to best meet the needs of trucking companies in ever changing market conditions. When choosing a freight factoring company, look for a lender that understands your business, has the tools and work practices to easily mesh with your company’s culture and has a solid commitment to support your funding needs through thick and thin.
eCapital is a leading freight factoring company with nearly 30 years of experience servicing trucking companies across North America. Our innovative products and dedicated customer service has earned excellent ratings across many review platforms. For more information about freight factoring, visit eCapital.com