Summary: Fuel advances have been gaining popularity among owner-operators and small fleet owners in recent years. They can be a useful resource for carriers that are just starting out or growing quickly. However, fuel advances also have drawbacks and can be an expensive solution. Carriers should use them carefully. This article explains how fuel advances work and provides a strategy for using them effectively. We cover the following:
- What is a fuel advance?
- Will a fuel advance help me?
- Fuel advance drawbacks
- How to use them correctly
1. What is a fuel advance?
Many transportation factors offer fuel advances as an add-on product to their existing factoring programs. Freight factoring plans can provide carriers with up to 97% (varies) of the invoices as soon as the load is delivered. However, using a fuel advance allows you to split the regular factoring advance into two payments.
The fuel advance provides up to 40% (varies) of the factoring advance as soon as you pick up the load. The remaining funds get advanced once the load is delivered.
For example, assume you get a 97% factoring advance with a 40% fuel advance. Your company gets:
- 40% when the load is picked up
- 57% when the load is delivered
Adding the 40% and 57% advances gives you the full 97% advance.
The primary use of fuel advances is to buy diesel for your trucks. However, many factoring companies allow you to use the advance for any business purpose. This upfront funding can be extremely useful if the company is low on funds or just starting the business.
2. Will fuel advances help me?
Fuel advances have several benefits and can help you grow your business. However, you must use them correctly. Consider using fuel advances only if:
- You don’t have a cheaper financial alternative
- Your profit margins are high enough
- You plan to use the money to cover urgent costs
- Your business is growing too quickly, and funds are low
3. Fuel advances have drawbacks
Fuel advances have two main drawbacks. You must consider these and use the advance only if it makes strategic sense.
a) They are expensive
Factoring companies charge an additional fee for this service. This fee is in addition to any factoring fees being charged on the funds. These costs can easily add up.
Fuel advances are expensive because they are risky. Other than your track record, the factoring company has no assurance that the load will be delivered properly. They could lose money if things don’t go well.
Additionally, most trucking companies that use fuel advances need them quickly. Factoring companies usually need additional staff to process these advance requests quickly.
b) They can lead to complacency
Using fuel advances regularly can also lead to some financial complacency. Owner-operators can afford to postpone handling collections or other administrative tasks because they can rely on this advance to fund operations. This is why fuel advances must be used carefully and strategically.
4. How to use fuel advances correctly
Fuel advances must be used correctly to ensure you get the most benefit. There are two things to keep in mind.
a) Use them on high-margin loads
Use fuel advances only on loads that have high margins. To do this, you must have a clear idea of your cost per mile, rate per mile, and expected fuel costs. Otherwise, you could pull loads at a loss.
Additionally, it’s best not to use them for loads obtained through load boards. These loads are notorious for having low margins. Using fuel advances could further reduce already low profits.
b) Use them carefully
Fuel advances must be used carefully and strategically to avoid complacency. Use them only if you must and for the shortest time that allows you to achieve your goal. Your objective should be to eliminate reliance on fuel advances as quickly as possible.
Do you need help paying for fuel?
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