Summary: Managing a growing freight carrier is difficult, especially while growing a fleet and adding drivers. While business growth is beneficial, it can also create cash flow problems. This article discusses how fast-growing carriers can use factoring to improve cash flow. You will be able to determine if it is the right solution to help your company. We cover the following:
- Growth can create cash flow problems
- How factoring improves cash flow
- Advantages of using factoring
- Additional services for truckers
- Using factoring the right way
1. Growth can create cash flow problems
Most owner-operators start their trucking companies hoping to grow their fleet eventually. There is one important catch. Adding trucks to your fleet and drivers to your payroll increases the challenges of running your business. Unfortunately, it also increases the chances of having serious cash flow problems.
a) Challenges of growth
Managing a carrier as an owner-operator is relatively simple. You need to make sure your rate per mile is higher than your cost per mile and generates sufficient profit. Additionally, you must plan your fuel purchasing strategy to take advantage of the cheapest costs. Lastly, you need a large enough cash reserve to cover shippers that don’t offer quick pays.
The situation becomes more challenging as your company grows. You must manage all the costs for different drivers, routes, and shippers. It’s easy for expenses to outgrow your cash reserve, especially if you are growing quickly. That scenario leads to cash flow problems.
b) Banks won’t help much
This type of cash flow problem is typically solved using a line of credit or a similar solution. You can always use the line of credit to cover expenses until shippers pay their invoices. There is one challenge.
Getting a line of credit is difficult. Most lenders demand a multi-year performance record and substantial assets. Few small carriers can meet these criteria. Carriers that cannot get a line of credit should consider a freight bill factoring line.
Learn more: Read “Run a Successful Trucking Company.”
2. How freight bill factoring improves cash flow
A freight bill factoring line lets you finance your invoices from reliable but slow-paying carriers and brokers. The line provides similar benefits to quick pays but has other advantages. It helps owner-operators and small carriers that are growing quickly and need funds to pay expenses.
There are two ways to structure factoring transactions in transportation. The structure you use depends on your fleet size and needs.
a) Single-installment transactions
Most owner-operators and small fleets choose single-installment factoring. This type of factoring settles the transaction in a single advance which can be as high as 98%. The funds that are not advanced become the factoring company’s fee once the shipper pays the invoice.
Single-installment transactions offer the most upfront cash flow. However, they can be more expensive than two-installment transactions.
b) Two-installment transactions
Larger carriers and those that don’t need the highest possible advance typically use two-installment transactions. These transactions provide an initial installment of 90% (varies). The remaining 10%, less the factoring fee, is deposited once your shippers pay the invoice. These transactions typically have lower costs since their advance is lower.
Learn more: Read “What is Freight Factoring?”
3. Advantages
Factoring lines help rapidly growing carriers because their benefits are tailored to improve cash flow. These are the five advantages of factoring that can help growing trucking companies.
a) Improves cash flow immediately
A freight factoring line can improve your cash flow quickly. This is the main reason why trucking companies use factoring.
b) Can be set up quickly
Most factoring lines can be set up quickly, usually in days. This feature is essential for carriers that have an urgent need for funding. Note that set-up time can vary based on transaction complexity and other details.
c) Lines expand with your business
The line can expand with your trucking company if you work with shippers and brokers with good business credit. Growing trucking companies like this feature because expanding the line is simple, and approvals can be obtained in a day or two.
d) Easy qualification requirements
Qualifying for a freight factoring line is easier than obtaining a bank line of credit of comparable size. Carriers usually need the following to qualify:
- Incorporation papers (Corp or LLC)
- Trucking authority
- Properly established trucking company
- Shippers with good business credit
- No liens against their business
e) Add-on services
Many factoring companies also offer additional services to their trucking clients. These services help you optimize and grow your business. We cover these in the next section.
4. Additional services
Each factoring company has its own suite of services for owner-operators and small carriers. The following three services are used the most.
a) Fuel cards
Several factoring companies offer a fuel card add-on that offers substantial savings to fleet owners. The factoring company leverages its size to get these generous discounts and pass them on to its clients.
b) Fuel advances
Some factoring companies offer fuel advances as an add-on to their factoring programs. These advances provide access to funds when you pick up a load and can benefit growing carriers.
c) Load boards and dispatch
Several factors have begun offering load board and dispatch services. These services can be useful at first. However, small carriers should always strive to find shippers directly.
5. How to use factoring correctly
If used correctly, factoring financing can be a great tool for owner-operators and growing carriers. Consider the following tips to improve your chances of success.
a) Use it as little as possible
Financing can help you grow and will likely impact your profit margins. Ideally, you should factor enough invoices to cover cash flow plus a margin of safety (cash cushion). Work with your CPA to determine the right amounts.
b) Don’t rely on fuel advances permanently
Fuel advances provide a great benefit that can help you grow. However, they are expensive and easy to get. This can lead to complacency. Use fuel advances only when needed and be certain that the load has a high profit margin.
c) Build a cash reserve
Start building a cash reserve. This helps you reduce your reliance on financing and is also the best way to minimize cash flow problems.
d) Develop a plan to move on
Factoring is an expensive form of financing. As such, it has its place in your strategy. Use it to grow your business while working to improve your operations and finances. Develop a long-term plan to obtain a line of credit that provides similar flexibility at a much lower cost.
Need more information?
We are a leading freight factoring company and offer low rates and high advances. For more information, get an online quote or call us at toll-free at (877) 300 3258.