Reasons Transportation Companies Use Invoice Factoring Services

Trucking industry is integral to the United States’ economy. It generates over $700 billion in annual revenue. Trucking is responsible for moving 71% of all freight in the United States and accounts for 6% full-time jobs. However, trucking, like any other industry, is rife with unique challenges. Ongoing cash flow and ready capital is one of the primary concerns faced by majority of transportation businesses. 

This is where truck factoring, transportation factoring, freight bill factoring, or freight factoring comes into the picture. 

Understanding Truck Factoring

Regardless of what you call it, truck factoring or freight invoice factoring works in the same way. Invoice factoring or accounts receivable factoring involves selling your uncollected client invoices at a discounted rate. Your funding partner or factor offers to purchase your invoices at a pre-specified fee. This fee is revenue to them and a discount for getting your hands on immediate capital.

Trucking and transportation companies are the lifeline to a long list of consumers and producers. Transportation industry generally has long wait times for invoice collection. Clients tend to clear invoices in bulk for the entire period. This can be 30 days, 60 days, or even 90 days. However, the bills don’t stop coming in. 

Trucking companies still need to maintain their fleet, pay salaries and wages, and clear all fixed operational dues in a timely manner. In addition, there are always the costs associated with employee turnover. Good drivers are hard to come by and it can be difficult to find and retain them. Cash flow can be a major concern for any company in any industry. 

However, it is a chief concern with most trucking organizations regardless of their size and the time spent in the industry. Having a strong cash flow is vital in this industry. And, this can be made possible by invoice or truck factoring. You need to understand that transportation factoring is different from a loan. You are not taking on more debt or liability when you sell your invoices to a factor. 

Instead, you collect on unpaid invoices upfront by paying a fee. It is generally the factoring company’s burden to make collections. However, in certain cases (recourse freight factoring) you are responsible for the invoices in case any client defaults on their payment. 

How Does Truck Factoring Work?

Many transportation companies rely on their factor partner as the go-to option when they are in need of cash or ready capital to plough back into their business. While you are waiting for your clients to pay up, you still need to carry out trips. It can take several thousands of dollars to make a single cross-country trip depending on your fleet size and the kind of consignment you are hauling.

You need to keep running loads to stay afloat. But, you still need payment for gas. This is where truck factoring comes in. You can sell your invoices today even if they are due after 60 days or 90 days. When you enter into a truck factoring agreement, you get paid a lump sum advance amount. This is usually 80% of the entire bills. The rest (minus the factoring partner’s fee) is paid when the invoices are paid by the client in full. 

You don’t need to wait another month or two months for the invoices to be due to collect on them. You can get paid right away. Most truck factoring companies don’t take more than 24 – 48 hours to pay the advance amount. Correlating with this, you can have a standing agreement with the factoring partner to factor a said amount of invoices each month. This way you never have to run out of money again. 

The factoring partner is responsible for collecting on the invoices. This leaves you free to focus on your business and operations. Besides the obvious upfront cash, there are several other benefits to using invoice factoring services. These are explained in detail below. 

Benefits of Truck Factoring for Transportation Companies 

• Ensures Quick Cash

It can be difficult to keep up with cash demands when you are a rapidly growing business. Every business faces a unique set of challenges, but most of them have cash crunch in common. When you get more loads, you need to invest in more trucks, employees, maintenance, and other things to keep up with demand. It can be suicidal to your business to say no to a large account client just because you don’t have ready capital. After all, opportunities don’t come knocking every day. 

Truck factoring lets you keep up with your cash demands. You can infuse fresh capital in your business without taking on extra debt. This way you never place any additional liabilities on your balance sheet. You don’t need to wait 30, 60 or 90 days to add more trucks to your fleet or hire more employees. You can ask your factoring partner to advance the required amount in exchange for your uncollected invoices. 

• Helps New Businesses

It can be difficult to start a new trucking business. You need a lot of cash upfront to build your reputation, fleet, and staff. At the same time, you need to pay for operational costs as well, such as overheads and gas to deliver a load. The worst part is that you need to infuse this capital even before you have been paid. By factoring your first batch of invoices, you can raise enough capital to continue your business.

The factoring partner will take a small share of your invoice amount as fee. Banks are not very generous when it comes to new businesses. You will need to show proof of your assets and your individual creditworthiness. Plus, bank processes can take a long time leaving you high and dry. In contrast, truck factoring only requires creditworthy clients. You could get the advance amount as soon as 24 – 48 hours. 

• No Increase in Debt

There are very few ways of raising money without taking on additional debt. Truck factoring is one of those ways, which is why many transportation companies are opening up to it. You don’t take additional loan when you receive an advance amount from a factoring company. Instead, you sell your accounts receivable at a fee. 

The accounts are closed when the factor receives the payment from your client and gives the remaining amount to you. You can gain access to additional money quickly without increasing your asset to debt ratio. 

• Option to Expand

Invoice factoring gives the much needed option to grow and expand your business. Most trucking companies cannot add on to their growth because of a lack of funds. All the money they make is tied up in client invoices and immediate payments. They are unable to take up new clients even when they want to because of lack of funds.

By factoring your invoices, you can free up enough cash to cover day-to-day operations and still have enough to take on more jobs. You can easily think about growing your freight business with the extra capital you can gain from your funding partner. Many trucking companies purchase additional rigs, hire more hands, and take on more jobs by factoring invoices. 

Factoring essentially helps you free up money sitting in your accounts receivable. It helps provide a steady stream of working capital for business growth. However, you need to make sure you partner with a reputed and experienced factoring company that understands your needs. That way you will be never be without ready cash. And, you will be able to take up new job orders and expand your business. 

• Focus on Business Operations

Several truck factoring companies offer assistance with collections, credit reporting, monitoring payment progress, and other key back-office tasks. This support can help you free up your staff and other resources to focus on more pressing operational functions and responsibilities. In addition, you don’t need to worry about collecting payments since the funding partner will take care of that. 

The factoring company shall provide the cash you need to grow your business and make your payments while helping you free up important resources. This way you can devote more time on client acquisition and relationships. You also get the peace of mind in knowing that your accounts receivables shall not be ignored. The factoring company will send payment reminders as and when necessary. 

• Flexible Payments

Traditional funding options, such as bank loans can be strict and unbending in their approach. In contrast, truck factoring offers flexibility to best suit your purpose and business. You can factor as many invoices as you need at a time. The amount you can raise is limited only by the number of eligible invoices your business has in a particular period. 

There are no restrictions in the way you use the advance amount. You are not answerable to the factoring company as to where you apply the funds. You can use it to purchase new rigs, invest in another warehouse, acquire more business, clear past dues, or in any other manner that is most convenient to you.