The fact is, freight factoring can stimulate growth and maximize cash flow for trucking companies. Owners of trucking companies both large and small will tell you that it can be very easy to find themselves in a cash flow crunch. While there are many causes for this, the most common is working with customers who do not pay their invoices when they are supposed to.
Instead of getting paid the moment the freight is delivered, some customers may take one, two, or even three or more months to pay their invoices. While this may seem crazy to those working in other lines of business, it is a common practice within the trucking industry. Meanwhile, owners of trucking companies have costs that they must keep up with, regardless of whether the customer is paying their invoice or not.
From fuel costs to payroll, benefits, and repairs, there is no shortage of ways that money can fly out the door of a trucking company. As a result, many motor carriers, from the smallest startups to the largest national carriers may experience moments where they do not have enough cash to meet the obligations of running their company. This usually always happens because they are waiting for payments to come through from their customers.
Trucking companies who have customers with excellent credit but are simply slow in paying their invoices, freight factoring is a viable option. It also presents itself as able to offer lower rates than banks or lending institutions. Indeed, some trucking companies find themselves in a situation where they may not even be able to secure a loan from a financing institution.
Even more, traditional financing options take quite a while to implement, while freight factoring can be provided relatively quickly. Applications for the process are often processed in a matter of days and the cash can be provided almost immediately. Furthermore, while interest rates accumulate with commercial loans from a bank, invoice factoring is generally executed for a small, one-time fee. Flat-fee factoring typically starts at around 1.59%, an incredibly low rate.
In return, factoring clients will immediately receive 97% of the value of their invoice, minus the fee. The factoring partner then pursues the customer for payment. This arrangement alleviates the trucking company from the burden of putting manpower or money to tracking down payment as well. Flexible factoring can also be used for quick-paying customers, with rates as low as 0.49%. Line of credit factoring for large enterprise companies starts with rates as low as 0.022% per day, an incredibly low amount.
Freight factoring offers itself as a perfect fit for startups, high-growth companies, businesses having a tough year, or fleets going through a change of ownership. Outstanding invoices should never prevent a company from growing. When you need the money, you need it now. Factoring can help companies prevent stalled growth by providing them with the cash they need when they need it.
Mistakes Companies Make
Still, factoring is not without risk. Trucking companies need to be very discerning in who they choose as a partner and what they accept when it comes to working with a freight factoring company. Not all freight factoring providers are created equal. Trucking companies that make a mistake when it comes to freight factoring often do so for several reasons.
- Non-transparency: Partnering with a factoring partner who offers attractive rates but is not transparent about the rest of their pricing structure can be a huge mistake. The last thing your fleet wants is to wind up with huge hidden penalties or fees because you did not do your proper due diligence on the partner you were getting involved with.
- Muddled Contract: Sometimes the contract is not clear. When you don’t know whether you are required to factor all your receivables or not, you could be caught in a bad situation. Good customers who pay on time should not be subject to factoring. You may also be required to pay an early termination fee if the partnership isn’t the best. Not watching for these problems can cost you big time.
- Poor Customer Service: If you partner with a factoring company who does not treat your clients well when they try to collect, this will reflect poorly on your company, not the factoring company. The last thing you want is to lose a valuable, but slow-paying client, because your factoring partner used hardball tactics that pushed them away from your business.
- No Funding: While it may seem a bit ironic, it is possible that a factoring provider simply has not been in business for very long and may not actually have the necessary cash flow themselves to pay you in a timely manner. Even companies that have been doing the job for many years may find themselves in a pinch. You want to partner with a freight factoring provider that has strong underlying fundamentals.
- Outdated Technology: We operate in the 21st Century and, as such, it is not outlandish to expect a freight factoring company to provide modern technological customer service that includes web portals and email documentation. If you must send things by fax or courier, you may not be partnered with the right factoring provider.
- Bad Debts: Trucking companies must be careful who they work with. Chasing bad debts is something the factoring provider will not do in the long-term. If the factor rejects a particular receivable, it is likely that the customer will not pay the debt and the trucking company should than reconsider their relationship with that shipper.
- Incorrect Payment: Failure to have payment sent to the freight factoring company is a common problem. If you factor a receivable, it is critical that you ensure the payment for that receivable is sent to the factoring provider. If the shipper unknowingly sends the payment to you, you will need to contact them to have it sent to the factoring provider, which will further drag out and complicate the entire process.
- Spotty Rate Quotes: If you know you are going to be factoring an account, it is important that you include the factor fee in your rate quote. A receivable that is factored by a rate of 5% will incur that fee. If you are building a rate quote, make sure you include the factoring fee, otherwise you will see a bit of a hit off the top of the payment.
- Not Doing Research: There are generally two types of factoring that fleets can work with, both recourse and non-recourse freight factoring. If you are not aware of which type of factoring is right for your company, you may find yourself coming out on the wrong end of the deal and doing very little to help put your cash flow in a better situation.
Never Be Too Reliant
Another commonly overlooked problem that trucking companies may run into when they partner up with a freight factoring company is becoming too reliant as factoring as a primary source of revenue for the business. While this may seem tricky, there is certainly a reason for it. Many small trucking firms rely on freight factoring providers to better manage their cash flow.
Yet, relying on freight factoring as the only way to fund operations is not a smart business strategy. While freight factoring should be part of a funding solution, it should not be the only solution. When a trucking company needs long-term funding needs, small business loans and other financing options should be the go-to and may be the better avenue of approach.
Consider that some freight factoring providers are also backed by banks, so when the factoring provider cannot come through with a solution, you may be able to transition to work with the bank working with the provider. Banks might be able to help offer better funding that more meets the trucking company’s needs.
Freight factoring can be a great solution for motor carriers both large and small, but especially for smaller carriers and owner-operators who need assistance in collecting debts and increasing net cash flow. Yet, this does not make it fool proof. There are many ways in which factoring can trip up a company if they are not properly vetting companies or following the right processes.
Always ensure you are reading the fine print and asking the right questions. In doing so, you can ensure that freight factoring will work for you no matter the situation. For a comprehensive list of freight factoring providers that might work in your area, simply click or tap on this link.