How an Asset-Based Loan Can Finance a Trucking Company

It’s not unusual for new or growing trucking carriers to have cash flow problems at one point or another. Cash flow issues commonly affect companies that are growing quickly. Before long, the carrier starts running low on funds and cannot pay some of its corporate expenses. At best, this situation makes managing the company difficult. At its worst, this situation can affect your ability to stay in business.

Fortunately, many of these issues can be solved using asset-based financing. This article covers:

  1. A common cash flow problem
  2. Funding small trucking companies
  3. Funding midsize and larger trucking companies
  4. Conclusion

1. A common cash flow problem

It’s common for trucking companies to have cash flow problems because they are growing too quickly. Carriers can also get into difficulties because most shippers pay slowly and take 30 to 60 days to pay an invoice. Either way, the trucking company runs out of funds before getting paid. This problem can affect the carrier’s ability to pay for necessary expenses such as:

  • Repairs
  • Fuel
  • Payroll
  • Other operations expenses

One solution is to negotiate quick pays with your shippers. This is a good strategy if your clients agree to it. However, trucking company owners often find themselves juggling bills while waiting to get paid. While juggling payments may help you for a short while, it’s not a long-term strategy. It will eventually create problems for your company.

You could easily fix these problems with a line of credit. However, this is where you face obstacles. Most lenders finance trucking companies based on their historical performance, cash flow, assets, management, and other parameters. Consequently, most lenders’ loans aren’t available to small and midsize carriers because they don’t meet these criteria.

One alternative does work in this situation. You can use asset-based financing. Companies that offer asset-based financing focus less on performance and more on a combination of your assets and potential. Trucking companies have one asset that can easily be financed: their accounts receivable.

These asset-based lines behave similarly to lines of credit secured by invoices. There are two options, and the one you use depends on the size of your trucking company. The next sections cover these options.

2. Owner-operators / small trucking fleets

Getting financing as an owner-operator or small fleet owner is usually very difficult. The company has the same cash flow problems as larger carriers. However, the company is not large enough to interest lenders. There is one alternative, though.

One solution that works well in this situation is factoring your freight bills. Factoring provides an advance against your slow-paying invoices. This funding improves your cash flow immediately. Advances can range as high as 98% and depend on the type of transaction you use.

In two-installment transactions, the advance pays up to 90% or so. The remaining 10%, less the fee, is deposited in your account once your customer pays. In a single-installment transaction, you get a single advance of up to 98%. The amount that is not advanced is the factoring fee. Most factoring companies that offer transportation financing offer both types of transactions. Keep in mind that single-installment transactions are more expensive than two-installment transactions.

The advantage of freight bill factoring over other options is that it’s comparatively easy to obtain. The transaction uses the credit of your invoices and shippers as collateral. Other than that, your company must not have any liens against your receivables, no major tax issues, or any legal issues.

For more information, read “What is Freight Factoring and How Does it Work?

3. Midsize and larger trucking carriers

Midsize and larger carriers that cannot qualify for a conventional business line of credit should consider sales ledger financing. Sales ledger financing is a type of asset-based funding that uses your receivables as collateral. It works for companies that have outgrown factoring but have not reached the point where they can qualify for a line of credit.

The line operates like an accounts receivable line of credit. It uses a borrowing base determined by your eligible receivables. Your company can withdraw funds up to a specified amount. However, the line is dynamic and adapts as new invoices are generated and old ones are paid off.

a) Advantages

On the surface, sales ledger financing looks a lot like factoring. However, the solution has many benefits that make it a superior option for larger carriers.

Sales ledger financing lines are easier to use than factoring lines. Accessing the funds is simple, as the line does not have the redundant controls common with factoring lines.

The line is designed to grow with your sales. The limit can easily be increased as long as you work with shippers and brokers that have good commercial credit. Rates are very competitive and are applied on monthly average use. The cost falls somewhere between the cost for a comparably sized factoring line and a line of credit.

b) Qualification requirements

Qualifying for a sales ledger financing line is easier than getting a line of credit. Trucking companies need to meet the following criteria:

  • Minimum sales of $300,000/month
  • Well-organized receivables and collections management
  • Good internal controls
  • Solid operations track record
  • No major tax or financial problems

4. Conclusion

Asset-based financing is an effective way to finance a trucking company that has cash flow issues and cannot qualify for a line of credit. Owner-operators and small carriers should consider factoring. This solution improves cash flow quickly and has simple qualification requirements.

Midsized and larger carriers with better internal controls should consider sales ledger financing. This solution is designed to resemble a commercial line of credit but offers more flexibility and is easier to obtain.

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