When it comes to dealing with slow-paying shippers, trucking carriers have two options: quick pays and factoring. This article helps you understand both options and covers the best strategy for using them. We discuss:
- The slow cash flow problem
- What is a quick pay?
- What is freight bill factoring?
- Which option is better?
- The best strategy
1. Slow cash flow is a problem
Slow cash flow is one of the biggest problems for trucking carriers, especially new ones or smaller ones. Though there are many reasons why a trucking company can have cash flow issues, the most common problem is slow-paying shippers.
Most shippers pay their invoices in 30 to 60 days. However, carriers usually need the payment sooner and can’t afford to wait. The trucking company has to pay for equipment payments, fuel, repairs, and other expenses that need prompt payment.
Cash flow problems are common for many fast-growing companies. This problem often happens because expenses get ahead of revenues, which puts the company in a financial bind.
Trucking carriers can deal with slow cash flow in one of two ways. They can ask for quick pays, or they can use factoring.
2. What is a quick pay?
A “quick pay” is a payment by a shipper or broker that is made quickly. Most shippers that offer this option pay their invoices in ten days or less.
Most shippers don’t offer this option for free. They deduct 1.5% to 2% (varies) from your invoice payment. A quick pay is the transportation industry’s version of an early payment discount.
Unfortunately, quick pays are not offered by every shipper or broker. This creates a problem. What do you do if you have a great shipper that does not offer quick pays? You have to consider the other option. If you need a fast payment, consider freight factoring.
3. What is freight factoring?
Factoring is a type of financing that helps companies improve their cash flow. It provides many of the benefits of a quick pay, but it can be used with more shippers.
The process to get financing is relatively simple. After getting set up, all you need to do is send the invoices and supporting paperwork. When this processing completes, the factor deposits the funds in your bank account or fuel card.
Keep in mind that factoring can be used only if the shipper has good commercial credit. Obviously, if the shipper doesn’t have a good history of payments, the factor will avoid their invoices. To learn more, read “What is freight factoring and how does it work?”
4. Which option is better?
Actually, the best position to be in is to not need quick pays or factoring. This is what you want to ultimately accomplish. The best way to get there is to build an emergency fund that is sufficient to cover expenses for a few weeks.
Building a cash reserve is easier said than done. It requires financial discipline and a well-run company. To do this, you have to:
- Grow the company carefully
- Find shipper contracts and rely less on load boards
- Handle ongoing cash flow problems
Until your company has a cash reserve, you will need quick pays and factoring to smooth out cash flow. Although we think quick pays are slightly better than factoring, you will probably need both.
a) Quick pay pros and cons
The obvious benefit of quick pays is that you get paid sooner. But they have one important disadvantage. Quick pays are not offered by every shipper or broker. Some shippers simply pay in 30 to 60 days.
Shippers can choose to offer quick pays as they please. They can also discontinue them any time cash gets tight. This means quick pays aren’t always reliable. Lastly, be careful which shippers you work with. Some unscrupulous companies will take the 1.5% to 2% discount and still pay you in 30 days.
b) Freight factoring advantages and disadvantages
The main advantage of factoring over quick pays is that you can use factoring with most shippers. Additionally, many factoring companies offer fuel advances, which can help when cash is tight.
Keep in mind that factoring companies will only finance invoices due from creditworthy shippers. This limitation should not be a big problem for you, since you want to work only with reputable shippers.
The main disadvantage of factoring is that you have to qualify for it. Getting factoring, though, is not difficult. Your carrier must be properly established and it cannot have any liens against accounts receivable.
5. Putting it all together
Where possible, your best option is to work with shippers and brokers that offer quick pays. Just make sure that they are reputable and have good commercial credit. As a backup, establish a factoring line and use it for shippers that don’t offer quick pays. Lastly, develop a strategy to build a cash reserve. Eventually, that will allow you to move away from depending on either option.
Get a factoring quote
We are a leading factoring company and can provide you with competitive rates and high advances. For more information, get an online quote or call (877) 300 3258.