The transportation industry (trucking) makes the world go ‘round. Without truckers (freight carriers) goods ranging from consumer electronics to produce would sit in warehouses, mouldering, without ever reaching the end consumers who want to buy them. Freight carriers are often small business owners, and cash flow problems can prevent you from running a successful business. Working with transportation factoring companies can give you the liquidity necessary to run a successful business.
What Is Factoring?
If you’re not familiar with the practice of factoring, a brief explanation is in order. Really, it’s nothing more than selling an unpaid invoice to a factoring company. They will then advance you most of the invoice amount (between 70 and 90% depending on the company in question).
They’ll handle collection of the invoice total (which frees up time on your end, which is a good thing for most freight carriers) and then pay you the remainder of the invoice amount after your client pays them. You’re charged a fee based on the amount of the invoice being factored (and a few other factors), which is taken off the remainder of the payment.
Is Factoring Just More Debt?
Most forms of business finance involve you simply taking on more and more debt. While it might work to keep your business flush with liquid capital in the short term, it’s not viable in the long term.
However, working with transportation factoring companies does not involve taking on more debt. You’re not taking out a loan. You’re selling an asset. It’s essentially no different than deciding to sell any other asset your company owns in order to build liquid capital. So, you don’t take on any further debt in the process.
Not only does that mean you don’t owe yet one more lender, it also means a couple of other things. Working with transportation factoring companies also means that there’s no need to go through a credit check, which is good news for most small business owners.
With all that being said, it’s not as simple as choosing a factoring company and selling an invoice. There’s’ more to it, particularly for transportation industry business owners.
Why Work with Specialised Transportation Factoring Companies?
If you take a look at a few of the options available to you in terms of factoring companies, you’ll find they’re split into two different camps. There are generalists, which work with business owners in almost any industry. Then there are specialists, such as transportation factoring companies. It’s actually important for you to work with a specialist.
The trucking industry differs greatly from others, and it requires specific knowledge and expertise in order to navigate it correctly. Generalist factoring firms lack that experience and knowledge. Of course, there are other benefits that working with transportation factoring companies can provide you.
Taking Over Collections
One of the most important benefits of working with transportation factoring companies has little to do with the infusion of liquid capital into your company, and more to do with freeing you up to do what you do best (running your company).
Many factoring companies will take over the collection process for you, ensuring that you don’t have to worry about that side of the transaction. This frees you to focus on lining up new customers, hauling loads, and then repeating the process. It’s a lot like having a collection/accounts receivable department of your own, except that you don’t have to pay them hourly, or worry about benefits or any other costs associated with hiring employees.
With that being said, not all companies offer to take over the full collections process for you. Some allow you to remain in control, so you’ll need to consider your requirements, and then choose a partner that offers the advantages that you want most.
What’s your single largest cost in running your operation? Other than the truck itself, chances are good it’s fuel. Finding ways to save on fuel can be a full-time job in its own right. Many transportation factoring companies offer fuel cards to help you save on the fuel you need to get the job done.
However, be aware that some companies charge an additional fee for these cards, while others offer them free as a perk of doing business with them. Make sure you scrutinise any contract for hidden fees or charges that might apply to fuel card use before you sign on with any factoring company.
If you’re running a new transportation company, it can be difficult to obtain insurance. A reputable factoring company can provide assistance here. Not only does that ensure you’re able to save money on insurance, but you’re also able to save time. Of course, this service isn’t offered by every factoring company, so if it matters to your situation, compare your options and choose a company that provides it (assuming that they’re on the up and up in other important areas, which we’ll touch on shortly).
It’s no secret that running a transport company comes with risk. You’re taking on a new risk with each client you haul a load for – will they pay on time? Will they pay at all? What is their credit history like? How many transport companies have they “stiffed” in the past? These are just a few of the concerns that you’ll have.
Checking each potential client’s credit history is a vital part of doing your due diligence, but it’s time consuming and frustrating. It’s also a challenge to do, particularly if you’re pressed for time running your business. Reputable transportation factoring companies can take this off your hands.
They have the experience necessary to check the credit on pretty much any corporate, industrial, manufacturing or retail client quickly and easily. After all, it’s in their best interests to ensure that you’re not working with risky clients. As your risk increases, so does theirs.
How Does Transportation Factoring Work?
We’ve already covered the fact that factoring is nothing more than selling an invoice, but how does that process dovetail with the specifics of the transportation industry? What should you, as an owner-operator, know about it?
Basically, here’s what you do after you’ve chosen your partner from the many transportation factoring companies available.
First, you book your load. Then, you email or fax information about the customer to the factoring company. They will run a credit check to determine if the company is a good credit risk, or if they’re a bad one. The factoring company will then let you know if they’ll approve the customer for factoring. If they will not, you are still free to haul the load – you just can’t factor the invoice.
Assuming the customer is approved, you load up and deliver everything to the destination specified. You then send your bill of lading and any other related documents to the factoring company. The company then handles collection of the invoiced amount, while providing you with an advance on the bill. Once your customer pays, you receive the balance of the invoice, less the agreed upon fee.
Considerations to Make When Choosing between Transportation Factoring Companies
As mentioned, transportation factoring companies vary considerably, and no two are identical. You’ll need to make an informed choice when partnering with any factoring firm, and that requires knowing some of the most critical considerations in the relationship.
Recourse/Non-recourse: You’ll find that most transportation factoring companies offer recourse factoring, which means that if your client defaults on payment, you’re responsible for repaying the money advanced to you. Non-recourse factoring is different – in this situation, the factoring company maintains responsibility, and you do not have to repay the advance. However, understand that non-recourse factoring tends to be more costly than recourse factoring, and less widely available.
Online Access: It’s crucial that you’re able to access information about your factored invoices on your schedule. As a transportation company owner, that could be virtually any time of the day or night. Make sure that the company you work with offers online access to this information (and that it’s updated in real-time).
Customer Service: It’s a safe bet that you’ll have questions or concerns at some point in your relationship with the factoring company. This will mean dealing with a customer service rep, or an account rep. Obviously, they should provide you with excellent customer service at all times. This can be difficult to check, but it’s vital you do. Contacting current or previous customers and learning about their experience with the company can help you determine what sort of customer service you can expect.
An Actual Specialist: We mentioned that there are specialists and generalists involved in factoring. However, some generalists will pretend to have experience or specialisation that they actually lack in order to get your business. Not only is that lacking ethically, but it can put you in a bad position. Make sure they actually have more than just a passing acquaintance with the transportation/trucking industry. You want to work with an actual specialist, not a generalist just pretending to specialise.
Ongoing Billing: While some factoring companies will allow you to sell one invoice at a time, that’s not true for all of them. Some will require that you factor all invoices from that client moving forward. This may or may not be a problem for you. As discussed, the benefits offered (fuel cards, collections handling, etc.) can often free up enough of your time that this might not be a problem. However, depending on the fees involved, and your ongoing need for liquid capital versus waiting for clients to pay you directly, it might be a problem.
Deposit Requirements: Most transportation factoring companies will not require a deposit from you before factoring an invoice, assuming they’ve run a credit check on your client and they were deemed creditworthy. However, that’s not true across the board. Find out if the company requires a deposit, how much it is, and whether deposits might be waived in the future (if you’re a new client just starting with the factoring firm) or if they are an ongoing requirement. While deposits might seem affordable, they eat into your capital, which is what you’re trying to increase in the first place.
Advance Amount: You’ll find that very few transportation factoring companies advance the entire amount due on the invoice. The industry average is between 70 and 90%, with the remainder (less the factoring fee) made up after your client pays the bill. Obviously, that’s a pretty wide range, and with larger invoices, even 20% can make a major difference in your ability to operate without interruption. Know the amount you’ll be advanced before you sign on with any company.
Factoring Program Complexity: Some companies have a flat-fee structure, while others have a variable rate format. For smaller firms, a flat-fee structure might be a better fit, while more established transportation companies might benefit from a variable rate option. Know which one fits you best, and find a company that can accommodate those needs.
Ready to Infuse Your Company with Cash?
If you’re ready to start the search for factoring companies that will help your business grow and thrive, it’s crucial to do your due diligence. There are trustworthy firms out there, as well as those that should be avoided. Moreover, there are generalists masquerading as specialists, and it can sometimes be difficult to tell the difference. We can help. We offer a free consultation with one of our factoring specialists to help you find the ideal partner for your needs moving forward. Factoring can provide you with the cash you need to keep growing, and we will help you make an informed decision.