This case study shows how invoice factoring can be used to solve the cash flow problems of a transportation carrier. To protect client privacy, we have changed some details (including their 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.
Setting up the case
Fast Trucking, Inc. (FTI), a fictional transportation carrier, was started by a husband and wife team, John and Stella Johnson. Initially, John handled driving duties while Stella manned the telephones and worked as the dispatcher. Slowly, they began to build their business, and before long they had a few trucks, some drivers, and had secured six large clients – retailers (e.g., grocery stores) that used FTI daily. At the time, each of these customers provided about $15,000 in monthly revenues. Like most large companies, however, these customers did not provide quick pays. Instead, they paid their invoices in net 45 days.
Asking for payment terms is very common in the transportation industry. This was a problem for FTI because the Johnsons had bootstrapped their business growth. The company had only $10,000 in the bank but had much more than that in expenses.
As the following table shows, the company had a cash deficit of $40,000 and was unable to pay for employees, fuel, and repairs. This type of scenario can often put a company into a tailspin that is very hard to recover from.
Solving the problem with factoring
All of FTI’s customers are large retailers with solid credit – verified through a credit bureau (e.g. Ansonia) – and a good track record of paying invoices. This enabled FTI to finance their freight bills with a factoring company. Since FTI was well organized, they were able to get started in 5 days – just before payroll was due.
The factor offered FTI a 90% advance on their accounts receivable. The remaining 10% would be rebated when their customers paid their bills in full. The following table provides a snapshot of their finances immediately after factoring:
By using freight factoring to finance their bills, FTI was able to convert their accounts receivable into cash – giving the company a surplus of $41,000. Now, the Johnsons were able to run their company optimally, without having to worry about fuel payments and other expenses.
The biggest benefit – growth
The Johnson’s had been aware of FTI’s financial problems and had intentionally avoided taking on new clients. They understood that growth was only good if they could provide quality services to their clients by keeping their trucks running. Once factoring was in place, John was able to start booking new client accounts. The company was now adding about one client per month, and within six months after they started factoring they had doubled their client base – and their sales. The following table shows a financial snapshot of their current finances:
Why did receivables financing work so well for FTI?
The receivables financing line worked very well for FTI for two reasons. First and foremost, the Johnsons were very smart business owners. They knew how to handle operations and pull loads while keeping costs down. Second, they had done a good job in getting great clients. This allowed them to finance all their receivables immediately, providing the greatest possible benefit.
The company plans to add up to ten more clients and then keep the company at that size. The Johnsons have no desire to grow beyond that. Depending on how quickly they grow and how much they save, they should be able build enough of a cash reserve to stop factoring in four to six months.