This case study shows how invoice factoring is used to solve the cash flow problems of a trucking company. To protect client privacy, we have changed some details (including the client’s name) in this case study. Also, the numbers have been simplified to make the case study easy to understand.
However, the key facts and lessons remain.
1. Setting up the case
Fast Trucking, Inc. (FTI) is a transportation carrier. FTI was started by a husband and wife team, John and Stella Johnson. Their initial setup was typical. John handled driving duties while Stella handled the telephones and worked as the dispatcher.
John and Stella operated the company cautiously and expanded slowly. However, the company grew quickly after a year in business since the transportation industry was booming.
After a couple of years, FTI had secured six large grocery store clients that required regular loads. The company had also grown and had added power units, trailers, and drivers. By all appearances, the company was doing very well.
2. The challenge
Eventually, the company encountered some cash flow issues due to its fast growth. Each customer gave the business about $15,000 in monthly revenue and paid their invoices in net-45 days. Like most large companies, these customers did not provide quickpays. Instead, they asked for payment terms. Their payments were very reliable; they just took 45 days. This scenario is common with corporate shippers.
This situation created a problem for FTI. The Johnsons had bootstrapped their business and had only $10,000 left in the bank. They had about $90,000 in open invoices that were due from clients. However, they also had $50,000 in payroll, fuel, and general expenses. The company was profitable, but had a $40,000 cash deficit. The following table shows a summary of the situation.
| Clients | 6 |
| Cash (Bank) | $10,000 |
| Accounts Receivable (Net 45) | $90,000 |
| Payroll | $20,000 |
| General Expenses (Fuel, etc.) | $30,000 |
| Cash Deficit | ($40,000) |
3. How freight factoring solved this problem
All of FTI’s customers are large grocery stores with solid business credit. The grocery stores had an excellent track record of paying invoices reliably in net-45 terms. This payment history was verified through a commercial credit bureau.
This situation enabled FTI to finance its freight bills with a factoring company. FTI was well-operated and had all their paperwork in order. This preparedness allowed the factoring company to set up the account quickly and deposit funds before payroll was due.
4. The terms
The factoring company offered FTI a 90% advance on their accounts receivable. The remaining 10% (less fees) would be rebated when their customers paid their bills in full. The following table provides a snapshot of their finances immediately after factoring:
| Clients | 6 |
| Cash (Bank) | $91,000 |
| Payroll | $20,000 |
| General Expenses | $30,000 |
| Cash Surplus | $41,000 |
| Factoring Company’s Reserve | $9,000 |
FTI could convert their accounts receivable into cash by using freight factoring to finance their bills. This transaction gave the company a $41,000 cash surplus. Freight factoring has allowed the Johnsons to run their company optimally without worrying about fuel payments and other expenses.
Go deeper: You can learn more by reading “What is Freight Factoring?“
Note: The industry has evolved since this business case was written. Most transportation companies can obtain advances between 90% and 97%.
5. The path to growth
The Johnsons had been aware of FTI’s cash flow problems and had avoided taking on new clients. This strategy was smart. They understood that growth was only good if they could provide quality services to their clients by keeping their trucks running.
Once the factoring line was in place, John began looking for new client accounts. Growth started slowly and cautiously. Eventually, the company added about one client per month. Before long, they had managed to double their client base and revenues. The following table shows a financial snapshot of their current finances. It assumes the client base grew to 12 clients, generating $180,000 in accounts receivable:
| Clients | 12 |
| Cash (bank) | $172,000 |
| Payroll | $40,000 |
| General Expenses | $80,000 |
| Cash Surplus | $52,000 |
| Factoring Company’s Reserve | $18,000 |
6. Why did receivables financing work so well for FTI?
This factoring line worked well for FTI because the Johnsons used it strategically. The company is well-managed, and the owners know how to find long-term customers and manage operations.
The company plans to add up to ten more clients and keep the company at that size. The Johnsons have no desire to grow beyond that. They also plan to build a cash reserve for their business. This strategy will allow them to stop relying on the factoring line eventually. There is no specific timeline to accomplish this goal, but they estimate it will take about a year.
We can attribute the success of this transaction to two key factors. First, the Johnsons are savvy business owners. They know how to handle operations, manage drivers, and keep costs down. Second, the company had a great client roster. The grocery chains they worked with had stellar business credit. This scenario allowed them to finance all their receivables immediately, providing the greatest possible benefit.
Marco Terry is the Managing Director of Commercial Capital LLC and has over two decades of experience in asset-based finance. He has worked with small and mid-sized companies across the United States, Canada, and Australia. Marco holds a Master of Science in Finance.