Financial problems usually hit trucking and logistics companies that are growing quickly or implementing turnaround plans. The company starts running low in funds and is unable to pay all of their corporate expenses. At best, this makes managing the company difficult. At it’s worst, it can affect your ability to stay in business.
Getting financing is critical since it can help the company pay for critical expenses, buy new trucks, and make new investments. However, midsize companies often realize that finding the right solution is usually difficult.
What is the right financing option?
Solutions like freight factoring can work well for smaller companies, but are not always well suited for larger trucking companies. Larger fleets may find that factoring costs more and can be difficult to manage.
On the other hand, conventional bank financing may not be an alternative either. Midsize trucking fleets seldom meet the banks’ financing requirements.
One option that can help growing midsize trucking companies is asset based lending (ABL). These lines provide many of the benefits of bank financing, but are easier to get. This makes them an ideal alternative for midsize fleets that have cash flow problems and need funding.
How can asset based lending help you transportation company?
Asset based lending allows you leverage your existing assets, such as accounts receivable and equipment. They provide you with immediate funds, which you can use to pay for company expenses.
As a matter of fact, asset based financing is very flexible and can be used in a variety of ways, including:
- Improve cash flow
- Pay company expenses
- Buy equipment and other assets
- Leveraged buyouts
As opposed to conventional banking solutions, asset based loans have few covenants and can be deployed relatively quickly. On average, the application and due diligence process can be completed in a couple of weeks. This makes them an ideal alternative for midsize logistics companies that need quick funding.
How does an ABL work?
The structure of an asset based loan varies based on the actual assets that are being financed. Usually, lines backed by accounts receivable are funded at an 85% (varies) of the gross receivables amount. They are structured to work like a revolving line of financing. Basically, your trucking company gets funding when invoices and freight bills are created. Transactions are settled as your shippers pay on net-30 to net-60 day terms.
Lines that are backed by other assets, such as machinery, are structured to resemble term loans. Your company gets an upfront amount which is amortized over a period of time. Machinery and other assets are often financed at a percentage of liquidation value. Note that liquidation value is often low, which makes it hard to leverage equipment. You can learn more here.
Advantages of using asset based financing
An ABL has a number of advantages over other financing solutions. The obvious one is that it will improve your liquidity and provide your transportation company with greater financial flexibility.
These solutions can be deployed quickly, making them a good choice to manage challenging financial situations. Most asset financing solutions are cost effective, especially when compared against factoring and other options. Lastly, one of the most important advantages of this solution is that it can be used as a stepping stone to other solutions, such as lines of credit.
Differences between asset based lending and factoring
Asset based lines are often compared with factoring. This is because both solutions can finance invoices. However, an asset based loan is different than factoring in a number of ways. The most important differences include:
- Asset based lending is only available to companies that have larger fleets
- Shippers are not usually notified of the relationship
- Most invoices are not verified
- Clients handle their own accounts receivable
Can your transportation company use this solution?
Asset based lending is a great financing option for transportation companies that have cash flow problems and need funding. They are a great alternative to conventional products and provide you with many of the benefits of conventional funding.
To qualify, the trucking company should have:
- A minimum of $1,000,000 in monthly revenues (if you have less than that, consider factoring)
- Must have invoices from quality shippers
- Established invoice tracking and collections process
- Reasonable financial statements
Looking for asset based lending?
We are a leading provider of asset based financing and can provide you with competitive terms. For a quote, please fill out this form or call (877) 300 3257.