How to Fund Freight Bills Using Factoring

Most trucking companies encounter cash flow problems at one point or another. This happens because managing a trucking company’s cash flow is challenging. Cash flow problems occur because most expenses are immediate while revenues are delayed by 30 to 60 days. This situation creates a gap in your cash flow that affects your ability to run the company. In this article, we discuss how to solve this problem by financing your freight bills. We cover:

  1. Why is there a gap in cash flow?
  2. Can quick pays close the gap?
  3. Financing your trucking company with factoring
  4. How does factoring work?
  5. Advantages
  6. Is this right for your trucking company?

1. Why is there a gap in cash flow?

One of the more challenging aspects of running a trucking company is managing its cash flow. In the transportation industry, most shippers and brokers pay their invoices on net-30 to net-60 days. However, many expenses, like payroll, fuel, insurance, and repairs, are immediate. This situation creates a gap between revenues and costs that eventually grows into a cash flow problem.

Managing this cash flow gap is relatively simple for companies that have a cash reserve. However, most owner-operators and small carriers don’t have a cash reserve. They have tight cash flows, so they try to manage this problem by juggling vendor payments. This strategy may work for a while. However, it usually fails in the long term, especially if the trucking company is growing quickly.

2. Can quick pays close the gap?

One strategy to manage this problem is to work with shippers that offer quick pays. Quick pays are the transportation industry’s version of a discount for early payment. Shippers and brokers that offer quick pays agree to pay an invoice in ten days as long as you give them a discount. Discounts range from 1% to 3% and are negotiable.

Quick pays can be an effective tool if your cash flow problems are not worsening or too significant. However, quick pays have a drawback. They are not as reliable as business owners think they are. Let’s look at a quick pay transaction from the shipper’s perspective. Shippers offer quick pays because it is to their advantage. They take a discount on your services which drops directly to their bottom line.

However, shippers offer quick pays only when their cash flow is doing well. Shippers can stop offering them at any time if their cash flow takes a hit. You never know when this could happen, which creates some uncertainty.

3. Financing your trucking company with factoring

A better way to get reliable cash flow is to use financing. You can use these funds to cover your expenses while waiting to get paid by clients. For most owner-operators and small carriers, the best solution is to use freight factoring.

Factoring enables truckers to finance their slow-paying invoices from creditworthy shippers. It provides the funds the company needs to pay expenses and take on more loads. Unlike loans and other lending solutions, factoring is available to small carriers and is easy to obtain.

4. How does factoring work?

Factoring works by providing an advance against your invoices. In most cases, transactions finance the invoice in two installments. However, freight factoring companies can also provide single-installment transactions if you prefer them.

a) How is factoring different from other solutions?

Most loans and lines of credit provide funds based on your company’s assets, cash flows, and track record. Most owner-operators and small carriers cannot meet these criteria. Consequently, they are unable to get a loan or line of credit.

Factoring is different. It uses the creditworthiness of your clients as collateral for the transaction. Factoring works this way because factoring companies do not usually lend money. Instead, your company sells its accounts receivable to the factoring company. The factor that buys your receivables pays you for them in either one or two installments. Since the transaction is usually a sale – and not a loan – it’s easier to obtain.

b) Single-installment transactions

Most owner-operators use a single-installment transaction. In this case, the factoring company advances between 95% and 98% of the invoice value. This single-installment advance is deposited to your bank account or fuel card once the invoice has been verified. The amount that was not advanced becomes the factoring fee once the client pays the invoice in full. Due to the higher advance and risk, single-installment factoring is usually more expensive than two-installment factoring.

c) Two-installment transaction

Most small carriers and large fleet owners use the two-installment factoring model. In this case, the factor advances around 90% of the invoice. This first installment is deposited to your bank account or fuel card once the invoice is verified. The remaining 10%, less the factoring cost, is deposited to your bank once the shipper pays the invoice on their usual terms. Two-installment factoring is usually cheaper than single-installment factoring.

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

5. Advantages of factoring freight bills

Factoring your freight invoices has several advantages for trucking companies. The most important benefits include:

a) Improves your cash flow quickly

The most significant advantage of using factoring is that it improves your cash flow quickly. It allows you to turn your accounts receivable to cash in a few days instead of waiting the usual 30 to 60 days.

b) Easy to obtain

Qualifying for factoring is easier than qualifying for other financing solutions. The most important requirements are that your shippers should be creditworthy, and liens/loans should not encumber your invoices.

c) Quick to set up

Most factoring lines can be set up and funded in a couple of days. This quick turnaround allows you to use factoring shortly after the need arises.

d) Grows with your trucking company

Factoring lines are designed to adapt to your business. The line adapts and can be increased quickly as your business grows.

6. Is factoring right for your trucking company?

While factoring is a great solution, it is not the right solution for every situation. It helps you only if your company meets these criteria:

a) You have cash flow problems due to slow-paying invoices

Factoring helps you only if your cash flow problems are due to slow-paying invoices. It does not help you if your problems are due to other causes (e.g., profitability).

b) Your shippers/brokers have good commercial credit

The main collateral for the transaction is your invoices from creditworthy shippers/brokers. Factoring can only help you if the invoices meet the credit quality criteria.

c) Your invoices are not encumbered by liens

Your invoices need to be free and clear and cannot be encumbered by liens from taxing authorities, judgments, or loans (e.g., MCA).

d) Your authority/documentation are up to date

Factoring companies will work with your company only if all its authority, insurance, and documentation are up to date.

Need more information?

We are a leading freight factoring company and can provide you with high advances and low rates. For information, get an online quote or call us at (877) 300 3258.