As the years go by, the way businesses must operate to be successful has grown increasingly complex. Working in the trucking industry requires a deft hand in these modern days. The economy is no longer a reliable barometer of business success considering how much it fluctuates in any given year.
When you combine market volatility with increasing technological demands within the transportation sector, trucking companies of any size have challenges meeting cash flow and growth requirements. As fleets look for innovative solutions to solving age-old problems, utilizing services like freight factoring can give them a crucial edge.
Freight factoring has been on the rise with trucking companies both large and small using it as a way to provide a better cash cushion during uncertain times. Even in non-uncertain times customers tend to take their time making payments. Letting outstanding invoices build for periods out to 90 days can deprive a business of critical finances in a busy business environment.
Whether it be to cover payroll, equipment or other overhead costs, freight factoring is a fast go-to financial backup resource for transportation operators of all stripes. When a company can turn an invoice into immediate cash, the pressure comes off the bottom line.
Still, not all freight factoring partners are created equal. Motor carriers must carefully evaluate who they partner with when handling sensitive financial transactions and tracking invoices. Proper research and careful vetting results in the right partnership.
It’s About the Financing
When setting out to find a freight factoring company that fits, it is important to ensure they specialize in the trucking and/or transportation industry. Challenges will arise, and an experienced freight factoring partner will be better able to help their clients meet those challenges. They should offer themselves up as trustworthy industry specialists.
Rather than offering just one plan or program, a good freight factor will offer at least a few separate plans tailored to fleets of different sizes and job applications. As an example, a trucking company who moves through their invoices quickly may want to opt for a flex factoring program with low fees of under .50% for up to ten days out from the date of payment. Larger fleets could opt for flexible lines of credit, retaining full control over their cash flow for fractional daily rates.
Is the process simple? Expect your freight factoring partner to compliment your business; you deliver the freight, send the invoice to the customer, copy the invoice to the factoring company and include all supporting documentation. Just like that, you should have up to 96 – 98% of the invoices value, with a small factoring fee taken off the top. The money is in your account within 24 hours. The remainder is held by the factoring company until the invoice is paid by the client.
Should there be any fluctuations within the economy, a trusted factoring partner can help trucking companies weather the storm. Even better, trucking companies don’t have to deal with the high interest rates from banks, but rather pay a small fee. Applications are generally processed very quickly, and the process is smooth.
Freight factoring is a perfect solution for startup trucking companies, high-growth enterprises looking for better cash flow or more capital, and businesses in transition, whether it be through a difficult year or a change in ownership.
The Future of Freight Factoring
Here at the QuickTSI blog, we pride ourselves in having our finger firmly on the pulse of the trucking industry, which involves knowing what is on the horizon. Now that freight factoring has become a standard financial services technique within the trucking industry, how will it evolve over time?
We recently reported on the new technology called blockchain and distributed ledger technology. Most don’t realize that blockchain technology can also have a significant impact on how freight factoring services are rendered. The answer lies in blockchain’s smart contract technology. There is now even a Blockchain in Transportation Alliance (BITA).
While blockchain technology has been most closely associated with cryptocurrencies, it can also be used in some interesting and quite technologically sophisticated ways. Companies are already developing methods and proving ways in which blockchain technology can be used to secure factoring partnerships and invoice transfers and transactions.
Since cryptocurrencies like Bitcoin cannot be used as payments within the transportation and logistics sector, mainly due to how the IRS classifies them. When a Bitcoin is transferred, it is considered an asset sale for tax purposes. Even more, since cryptocurrencies are so volatile, making a payment using them would hardly constitute equal value from one day to the next.
Yet, the transportation industry can still utilize the underlying blockchain technology within the freight factoring sector.
The Smart Contract
Where logistics and transportation companies and freight forwarders can get the most out of blockchain technologies is through the use of smart contracts. Smart contracts operate on a more advanced blockchain platform than Bitcoin. Rather than simply executing peer-to-peer transactions, the platform smart contracts are built on a technology that allows them to run a decentralized network.
A decentralized network – think: a cloud computing environment – is one in which developers can build applications without one company (such as Amazon) controlling the environment. On a peer-to-peer nodal network, everyone on the network is verifying the contracts being transmitted. Security is inherently guaranteed due to the nature of the system.
Even better, smart contracts are both flexible and robust. There are plenty of potential use cases where this technology can supplement, enhance, and provide a secure environment for freight factoring contracts and invoice-related transactions.
Still, this doesn’t mean that this technology will solve all of the problems associated with transportation-related financial transactions. Instant, net zero payments require instant capital. Longer payment cycles are much more appropriate for blockchain technology. This is where the freight factoring sector stands to benefit.
Efficiencies and Processes
Where this technology stands to make the biggest impact is in the back office. Blockchain technologies and smart contracts can help organizations streamline back office efficiencies, close any leaky financial gaps, create a better environment for systems integration, and wean them further off of financial loans from banks. This could create an environment where freight factoring service providers fill an essential financial need with a high level of security and redundancy.
A 2% fee spread out across 30 days still results in a high APR. Since freight factoring is not as simple as a single transaction, it takes more time and labor to implement. Servicing factored debt requires more resources than, say, a home mortgage. Trucking companies and others working in the transportation sector should not expect blockchain to change the fundamentals of how transportations facilitate transactions.
Factoring, as a credit product, requires a premium. By bettering the processes associated with the factored product and streamlining efficiencies through a robust blockchain technology, the cost of financing drops. This will drive down rates and allow for better margins on both sides of the transaction.
Looking at the history of freight factoring pricing regimes, it is apparent technology has already played a part in driving down overall costs. Rates around 5% are seldom seen these days. Anything at or less than 2% is considered average. By utilizing common data standards, the costs associated with the transaction will drop.
What it Looks Like
What would a freight factoring transaction in the digital blockchain space look like? First, consider the work flow.
First, the trucking company presents the invoice, approves and pays on a distributed ledger, confirms the rate, and follows through from invoice approval and final payment. Throughout the process the blockchain catalogs essential points on the transaction, such as load pick up, load tracking and load delivery.
Blockchain technology also allows for better systems integration. There are so many different ELD providers out there. Standardizing systems across platforms would not be a bad thing.
The essential question here is whether or not we will see trucking companies, both large and small, quickly adopt the use of this technology. By its nature, the trucking industry is fragmented and can be slow to incorporate new technologies and business methodologies. After all, whether one is a fleet manager or fleet technician, those working in the trucking industries usually don’t have computer science degrees. Will this technology be user-friendly enough?
The jury is still out on a lot of how freight factoring will evolve in the 21st Century. Technology has already had an impact. Will it have another? As you can always rely on, we will be right here telling you all about it once the verdict comes in.