Financing a Small Transportation Carrier with Freight Factoring

Most small carriers are owned by drivers who learned the industry, become owner-operators and eventually grew their fleets. They run lean operations with limited resources, and every dollar is valuable. Owner-operators and small companies are often unprepared to handle the financial difficulties of growing a fleet. This article discusses how small trucking carriers in Canada can finance their companies using factoring. We cover:

  1. Cash flow problems are common
  2. What is freight bill factoring?
  3. Additional services
  4. Costs
  5. Do you qualify?
  6. Build a cash reserve

1. Cash flow problems are common

Most small trucking companies have cash flow problems at one point or another. These problems can happen for several reasons, such as challenging economic conditions, pricing problems, slow-paying clients, or growing too quickly

A common source of financial problems is that shippers and brokers often pay their invoices on net-30 days or longer. This delay creates a problem for carriers with low cash reserves and exposes them to bad debt risk. Let’s examine this situation from the carrier’s point of view.

a) Small carrier’s point of view

From a carrier’s perspective, it’s easy to see how they can encounter cash flow problems by offering 30-day payment terms. The carrier has to cover all the expenses of picking up the load and hauling it to its destination. They also have to find a load to haul back that is reasonably close to the destination. Otherwise, they will increase their deadhead miles, which affects profitability.

There is also the risk of providing net-30-day terms to shippers that are bad payers. These payers take longer to pay their invoices, or worse, don’t pay them at all.

b) Are quick pays the solution?

In principle, most of your cash flow problems would be solved if your shippers and brokers paid quickly. Some shippers and brokers offer quick pays. This gets you a payment in 10 days or less if you are willing to give them a 2% discount. Quick pays work great, though they aren’t always dependable.

Shippers offer quick pays only when it is to their advantage. In these cases, the carrier typically has a large cash reserve, which they use to pay you quickly. This quick payment gets them a discount, which increases their profit margins. Freight brokers offer quick pays when they can. After all, it’s to their advantage to treat their carrier-partners well. However, many freight brokers have their own cash flow problems and need financing as well.

Shippers always have the option to take quick pays away and pay on regular terms. This can happen during periods of economic uncertainty or if the shipper is experiencing financial problems.

One way to improve cash flow without depending on quick pays is to finance your invoices using freight bill factoring. We cover this solution in the next section.

2. What is freight bill factoring?

Freight bill factoring is a specialized financing product that helps owner-operators and small carriers improve their cash flow. The product works by providing an advance on your slow-paying invoices from creditworthy shippers. This payment provides the funds you need to pay ongoing expenses and take on new clients. Factoring companies can structure transactions to either have a single instalment or two instalments.

a) Single-instalment transactions

These transactions, also known as “full advance” factoring, are popular with owner-operators. They provide the highest initial advance, and the factor advances up to 97% of the invoice. The remaining funds become the factoring company’s fee.

b) Two-instalment transaction

These transactions are more common with more established carriers. Larger carriers prefer this financing model because it usually costs less than single-instalment transactions. The first instalment covers up to 90% of the invoice and is deposited into your account as you factor it. The remaining 10%, less the fee, is deposited into your account as a second instalment once the shipper pays the invoice in full.

To learn more, read “What is Freight Bill Factoring? How Does it Work?

3. Additional services

Most factoring companies that focus on the trucking industry offer their clients additional services. They include the following:

a) Credit checks

One benefit of working with a factoring company is that they help you check the creditworthiness of your shippers before you take on a load. This assistance helps ensure that you provide payment terms only to clients who deserve it and have a high chance of paying on time. It also helps avoid bad debt.

b) Fuel cards

Most factoring plans work with fuel cards and can deposit funds to your existing account. Some factors offer fuel card benefits, which can provide additional discounts.

c) Load boards

Some factoring companies also offer load board access to their clients. Load boards can be helpful when used correctly. However, owner-operators will likely be more successful if they get loads from direct shippers.

4. Costs

The cost of the line is determined by your volume, the credit quality of your shippers, and whether you are using a single-instalment transaction or a two-instalment transaction. Costs can range from 1.5% to 4% based on these criteria. However, the final cost is determined based on the transaction details.

5. Do you qualify?

Qualifying for freight bill factoring is easier than qualifying for conventional bank financing. The most important requirements include having:

  • All permits, insurance, etc.
  • Creditworthy shippers
  • Invoices that are free of encumbrances

Your invoices must be free of encumbrances because the factor uses them as collateral for the transaction. Factors usually run a PPSA search (or hypothèque search if you are in Quebec) to ensure they can secure their position.

6. Build a cash reserve

A common strategy is to use financing while a company is growing quickly or having cash flow problems. It can work well if used correctly. However, your company should still have a long-term plan to build a cash reserve. This reserve helps ensure the company can manage cash flow problems in the future without having to incur the expense of financing.

Get a factoring quote

Are you looking for a freight bill factoring quote? We are a leading company in Canada and can provide you with high advances at low rates. For information, please call toll-free (877) 300 3258.