Factoring Financing for Small Freight Carriers

Most small freight carriers don’t have adequate cash reserves. This situation is common for small businesses. Unfortunately, this lack of a reserve leaves them vulnerable to cash flow problems. Managing these cash flow problems is difficult because smaller trucking companies usually don’t have easy access to bank financing. This article discusses how small carriers can fix this problem and improve their cash flow quickly. We cover:

  1. Are you managing cash flow correctly?
  2. Dealing with slow payments
  3. Financing invoices with factoring
  4. How does it work?
  5. Qualification criteria
  6. Option for larger carriers
  7. Conclusion

1. Are you managing your cash flow?

Most owners are very capable when it comes to managing their trucks, drivers, repairs, and loads. Many small carriers are managed by entrepreneurs that started as owner-operators. They are familiar with the basics of running a transportation business.

However, many owners fall short when it comes to managing their cash flow. They may have been able to manage their financial challenges when they were owner-operators. But things are different when you own a small fleet that has drivers and other employees. The scale and the urgency of the problems increase. A cash flow problem could cause you to miss payroll or miss a load from a critical shipper, both of which could hurt the business.

As an owner-operator, you may have stayed afloat by juggling payments or delaying your salary. It’s much harder to juggle payments when you own a small fleet. Eventually, the business gets into serious trouble and goes into a tailspin. So, how do you solve that problem?

2. Dealing with slow invoice payments

The most common reason that small freight carriers experience financial problems is that their customers pay invoices in 30 to 60 days. This delay would not be a problem if the carrier had a cash reserve. They could use the reserve to pay expenses while waiting for payment. Unfortunately, most small carriers don’t have a cash reserve.

Most carriers handle this situation by asking shippers and brokers for quick pays. Quick pays are the transportation industry version of the discount for early payment that many companies offer. Quick pays can work well if the shippers offer them. However, they are optional, and the shipper can always choose to pay in their usual 30 to 60 days instead. If your cash flow problems are not too serious, this delay should not be a problem. However, if you are growing quickly or have a serious cash flow problem, you should consider supplementing quick pays with external financing.

3. Factoring your invoices (truck factoring)

Getting a regular business line of credit is difficult for most small businesses, especially trucking carriers. Lenders like to see solid collateral, such as assets and cash flow. They also want to see a track record of profitability and good cash flow. Consequently, few carriers can meet the qualification criteria for conventional financing.

However, most carriers have a solid asset that can be financed: their invoices from credit-worthy shippers. Invoices can be financed using freight bill factoring. By factoring their freight bills, carriers can get funds against their invoices quickly. This cash infusion provides the funds they need to pay business expenses, take on new shippers, and grow.

4. How does freight factoring work?

Transactions can be done in two ways. Owners can choose between a single-installment transaction or a two-installment transaction.

In a single-installment transaction, the factoring company advances 95% to 98% of the invoice as a single installment. The factoring company retains the part that was not advanced as their fee. Owner-operators and very small fleets often choose single-advance transactions because they provide the most cash upfront. However, single-installment transactions are also more expensive than two-installment transactions.

In a two-installment transaction, the factor advances around 90% of the invoice as the first installment. The remaining 10%, less the factoring fee, is deposited as a second installment once your shipper pays the invoice. The second installment settles the transaction. This is the preferred option for larger fleets since it is the most cost-effective.

a) Fuel advances and other benefits

Many factoring companies also offer fuel advances, fuel cards, load boards, and other benefits. Fuel advances can be helpful to small fleet owners as they can provide an advance of up to 40% as long as you have a rate confirmation sheet (this varies). This advance can be used to cover fuel, delivery, and other company expenses. Keep in mind that fuel advances are more expensive than factoring and should be used carefully.

b) Advantages

Freight factoring lines have several advantages. They include:

  • Improves your cash flow quickly
  • Easy to obtain
  • Grows with your business
  • Available to small companies with a limited history
  • Available to companies that have some financial problems

To learn more about freight factoring, read “What is Freight Factoring? How Does it Work?

5. Qualification

Qualifying for a factoring plan is much easier than qualifying for conventional financing. In general, trucking carriers must meet the following criteria:

  • Have a valid fmcsa authority
  • Work with creditworthy shippers/brokers
  • No liens against invoices
  • No major tax problems (unless you have a tax plan)
  • No open bankruptcies
  • Owners must have experience

6. Option for larger trucking carriers

Trucking carriers that invoice over $200,000 per month should consider using sales ledger financing instead of factoring. It’s an asset-based financing option that is designed to work as an accounts receivable line of credit. The line operates using a borrowing base that adapts to your accounts receivable. You can withdraw funds up to a limit, and the account settles as invoices get paid. The lines are easier to use since they do not have the redundant controls common with factoring lines.

Qualifying for sales ledger financing is not as easy as qualifying for factoring, though. Carriers need to have a well-established invoicing and collections process and need to be well-run.

7. Conclusion

Small trucking companies that have cash flow problems should consider using accounts receivable factoring. The solution is available to small carriers, provides many of the benefits of a line of credit, and is easier to get than bank financing.

Larger carriers that invoice over $200,000 per month should consider sales ledger financing. Sales ledger financing has many of the advantages of factoring and resembles a line of credit. Both solutions improve cash flow and can help provide a stable financial base for your company.

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