In this article, we discuss the ways you can finance new and growing trucking carriers. Trucking companies are well known for needing financing to cover daily operations. This is usually due to cash flow issues. While common, this situation can and should be fixed.
Financial problems are common with most new businesses, but they should be temporary. Unless the company is in growth mode, trucking companies should not need ongoing financing to operate smoothly.
We start this article by discussing low profit margins. They are the root cause for most carriers’ financial problems and the reason you may need financing. We also discuss some ways to to fix this problem. We then discuss some financing tools you can use to improve your cash flow. Use these tools while you steady the company and build up a cash reserve. Once you have a cash reserve, you will no longer need financing.
Problem: Low profit margins kill your business
If you ask owners about the source of their financial problems, they usually point to some common culprits. These include slow-paying clients, rising fuel costs, regulatory compliance expenses, or simply not having enough funds. These issues are headaches for sure. They need to be handled. But they should not cause long-term financial problems for a well-managed carrier.
There is an underlying issue, though: low profit margins. This may be why you don’t have enough funds to pay company expenses. Most new carriers are desperate for clients. They haul low-paying loads just to get started and barely make ends meet. Some owners eventually overcome this situation, get better shippers, and grow. Those that don’t, however, get perpetually stuck in neutral. They also get stuck with long-term financial problems.
The solution is simple: get your business in order. Start by accurately calculating your costs per mile. Otherwise, you could operate at a loss without even knowing why. Then, determine your rate per mile. This gives you an idea of how much you can expect to be paid. With these two figures, you can determine your expected profits. Once you have this information, you can start actually looking for better loads to haul.
Use load boards sparingly and only when absolutely necessary. Load boards are highly competitive and pay the least per load. Instead, invest the time to find trucking contracts and high-paying freight loads. It takes a lot of effort, but the increase in profits is usually worth it.
Problem: Invoices pay slowly and cash flow is tight
When they first get into the business, few trucking company owners realize how tight cash flow gets. But tight cash flows are often a reality of the freight industry. Brokers and shippers can take 30 to 60 days to pay for an invoice, and you are stuck waiting.
Slow payments create a big dilemma for truckers that aren’t prepared for them. Trucking companies have an endless list of expenses that must be paid. They have to cover fuel, repairs, rentals, office expenses, salary, and so on. You can’t delay most of these payments, and they must be paid when due.
This puts you – the owner – in the middle of a common cash flow problem. Your clients want to pay you slowly. Your vendors, on the other hand, demand quick payments. Fortunately, there are two ways can improve your cash flow.
1. Quick pays
The simplest way to accelerate your cash flow is to offer your shippers an incentive to pay you sooner. The incentive your shippers are looking for is a discount. Offering a discount for an early payment is common in business and can work very well.
Larger shippers and most brokers that offer quick pays have defined discounts. For example, they will take a 2% discount and pay your invoice in 10 days or less.
Be careful of some companies that may take the quick pay discount but still pay slowly. This scenario could worsen your cash flow problems. You can spot these companies by looking at the shipper’s credit report.
But what happens if your shipper does not offer quick pays? What do you do then? This leads us to our next option.
2. Freight bill factoring
Freight bill factoring is a financial tool that allows carriers to bridge the gap between invoicing and shipper payment. The mechanics of factoring are fairly simple. After delivering a load, you submit all the paperwork to the factoring company.
The factoring company processes your invoices and gives you an advance. The advance is deposited in your bank account or fuel card. The advance percentage varies between 90% and 97%. The remaining 3% to 10% that was not advanced is rebated, less a fee, once the shipper pays the invoice in full. For more details, read “What is freight bill factoring? How does it work?”
An important advantage of factoring your freight bills is that this solution is easy to get. Most new carriers can easily qualify. The most important requirements to qualify are to:
- Have quality invoices that are free of liens
- Be free of major problems
The solution is very flexible. Your line can increase as your business grows. When used correctly, factoring can be a great financial tool to grow your trucking company.
Problem: Need money to pay for fuel
One of the challenges you encounter when cash flow is tight is not being able to pay for fuel. This is serious because without fuel you cannot work. If factoring cannot solve this problem, consider using a fuel advance. Fuel advances are a benefit that is offered by some factoring companies. A fuel advance provides you with funds to pay for fuel and other expenses before you deliver a load. They can be a great resource if you are in a bind.
To get the advance, you must provide the factor with proof that the load has been booked and/or picked up. This proof varies by factor. While fuel advances have important benefits, they are also expensive. It’s best to use them strategically. Lastly, keep in mind you have some control over fuel costs. You must understand how IFTA works in relation with diesel prices along your chosen lanes. Then plan your route and refueling accordingly. This strategy can help ensure you get the cheapest diesel price, which reduces your need for fuel advances.
Problem: Need funds to buy more equipment
Lastly, if your company is growing, you will need to buy equipment. The best option for this situation is to use an equipment financing company. There are a number of companies in the market with competitive offers.
If you are currently working with a factoring company, ask them about this as well. Many factors offer equipment financing directly to their trucking clients. Those that don’t offer equipment financing usually have partnerships with companies that provide the carriers with preferential treatment.
Get a quote
We are a leading factoring company and can provide you with a competitive quote. We offer high advances and low rates. To get a quote, fill out this form or call us toll-free at (877) 300 3258.