Most third-party logistics (3PL) companies endure a constant tug-of-war between revenues and expenses. This struggle makes managing cash flow difficult.
One common problem is the manner in which commercial customers and shippers pay their invoices: they pay slowly. Few offer quick pays, and instead opt for paying invoices using standard commercial terms of 30 to 60 days.
Slow payments create problems
Unfortunately, few third-party logistics companies have the resources to wait up to two months to get paid. They have suppliers – warehouses, trucking companies, and others – who often need to be paid quickly.
If the company is well capitalized and has reserves, this payment delay won’t cause any problems, as they can pay suppliers and be reimbursed quickly when the client pays. If the company does not have reserves, a potential solution is to seek business financing.
Getting bank financing is difficult
You can solve this cash flow problem easily with bank financing – either a business loan or a line of credit. However, qualifying for institutional financing remains challenging.
Most banks provide financing only if your company already has sufficient cash flow to pay for the loan. Additionally, banks often require additional collateral such as equipment or real estate to secure the transaction.
Ultimately, bank financing can be out of the reach for many small business owners. Fortunately, another solution can solve this problem, and this solution often works better than a business loan: freight broker factoring.
Financing freight bills improves cash flow
Freight factoring improves cash flow by accelerating the funds tied to slow-paying freight bills and invoices. This solution provides the 3PL company with immediate funds to pay suppliers and take on new contracts. More importantly, it provides a company with financial stability, enabling management to move strategically instead of always dealing with cash flow problems.
How does freight factoring work?
Freight factoring finances your open invoices, usually in two installments: the advance and the rebate. The advance covers about 90% of the gross value of the invoice and is provided after you invoice a client for completed services. Funds are usually wired to your bank account.
The remaining 10% is rebated to your account after the customer pay the invoice in full, after the standard 30 to 60 days. The finance fee is usually deducted from the rebate.
Can my third-party logistics company qualify?
To qualify for freight factoring, a third-party logistics company must have creditworthy customers. This requirement is perhaps the most important qualification criteria because the transaction hinges on the creditworthiness of customers and their invoices.
Also, a third-party logistics company should meet the following requirements:
- It must not have any serious legal or tax problems
- It must only invoice for delivered loads or completed work
- Invoices must be free of liens
- Company owners must have a good reputation and logistics industry experience
One competitive advantage of freight factoring lines is their flexibility. The lines are designed for growth and increase automatically as your sales grow, provided that your customers have good credit and that your company meets the factoring company’s criteria. This flexibility makes freight factoring an effective alternative for companies growing quickly.
Freight factoring can also be used if you need financing quickly because of unexpected cash flow problems. The application process is fairly simple and most lines can be underwritten in a day or two.
It’s not unusual for companies to receive their first funding within a week of submitting an application, provided everything goes as planned. Speed of deployment, coupled with financial flexibility, makes freight factoring an ideal solution for growing 3PL companies.
Get an instant quote
We are a leading factoring company and can provide you with high advances and low rates. For more information, get an online quote or call (877) 300 3258.