Most owner-operators and small freight carriers prefer to work with shippers that offer quick pays. Unfortunately, many shippers and brokers don’t offer them. This situation creates a problem for truckers looking to grow their companies but can’t afford to wait 30 days or more for a shipper to pay them. This article shows you how to haul loads from shippers that pay slowly while avoiding the cash flow problems that come with slow payments. We cover:
- What is a quick pay?
- Advantages and disadvantages
- Build a cash reserve
- Use freight bill factoring
1. What is a quick pay?
Most shippers and brokers pay their invoices in net-30-day terms or longer. These terms allow the shipper to pay their invoice 30 days after your trucking company delivers the load to its destination. Working with shippers that pay on terms can create a problem for owner-operators and small freight carriers.
Let’s look at this situation from the trucking carrier’s perspective. The trucking company has to pay the expenses associated with picking up and hauling the load. These expenses come out of their cash reserves. After delivering the load, they still must wait 30 days to get paid. This situation drains their resources, affects their ability to grow, and can lead to financial problems when not managed correctly.
A “quick pay” solves this problem. Quick pays are the transportation industry’s version of the commonly used early payment discount. They allow the shipper to take a discount, usually 2%, from their invoice if they pay the invoice within ten days. This early payment shortens the carrier’s payment cycle and improves its cash flow.
2. Advantages and disadvantages of quick pays
Most trucking companies focus solely on the benefits of getting quick pays. After all, they can improve your cash flow dramatically. However, quick pays also have some drawbacks that company owners should consider.
The advantage of a quick pay is simple. Your company gets paid in ten days or less. This improves your cash flow and provides funds to pay business expenses and grow the business.
Most trucking company owners don’t usually consider that quick pays can have disadvantages, especially when used incorrectly.
i) They aren’t always reliable
The main disadvantage of relying on quick pays is that they can be unreliable. Consider the situation from the shipper’s perspective. What is the shipper’s incentive to offer quick pays to their carriers or brokers? In most cases, the shipper has a solid cash reserve, so they pay you early to take advantage of the discount. The savings from taking the discounts increase their profits. It’s great for them and good for the carrier.
A shipper that runs low on cash due to the economy or other issues will likely stop offering quick pays. Like any business, they would do their best to keep as much cash as possible. This situation can create problems for you, especially during economic downturns.
ii) They can be expensive
In most cases, quick pay discounts are competitively priced. However, many new or growing trucking carriers have low profit margins. This situation is unfortunate. It happens because the carrier doesn’t have accurate cost-per-mile information about their business. Consequently, their rates don’t generate enough profit once you consider the actual costs.
Using quick pays, or any form of financing, can become a problem on loads with low profit margins. These costs further reduce your profits and could make some loads unprofitable. The right way to handle this situation is to ensure that your cost-per-mile reflects your actual costs so that your rate-per-mile builds in a reasonable profit.
3. Build a cash reserve
Every trucking company should have a cash reserve. It helps reduce cash flow problems and provides stability. Building a cash reserve is simple but requires discipline. Start by determining the size of your reserve. This amount is flexible and can be determined only by you. Having a month or two worth of expenses is essential. More is usually better, up to a point.
Building the reserve itself is simple. Every month, deposit a small portion of your profits into a separate bank account. Repeat this process until the account reaches the desired level. Lastly, use the cash reserve carefully and always replenish it after using it.
4. Factoring financing
Cash reserves and quick pays can have their limits. If they don’t solve your problems, consider using freight factoring. Factoring is a type of financing used by trucking carriers to help improve cash flow. It provides benefits that are similar to quick pays, but with wider availability.
a) How does factoring work?
Factoring works by financing your invoices from creditworthy shippers. The factoring company advances up to 95% of the invoice and deposits the funds to your bank account. The remaining amount, less fees, is deposited into your account once your shippers pay on their usual terms. To learn more, read “What is Freight Bill Factoring?”
b) What are the advantages?
The main advantage of freight bill factoring is that it solves your cash flow problems from slow-paying shippers. Also, qualifying for factoring is relatively simple and is easier than getting conventional financing. The main requirements are to have creditworthy clients and invoices that are free of liens. Lastly, the line adapts to your company’s growth. The line can increase as you find new loads, book new clients, and increase your revenues.
Get more information
Do you need to get paid quickly? We are a leading factoring company and offer high advances at low rates. For more information, call toll-free (877) 300 3258 or get an online factoring quote.