Trucking companies are an important sector of the automotive and transport industry in America’s society. The trucking business can be very profitable and lucrative if you set up your factoring company correctly. Still, it can also be met with extreme competition and potential for the debt if not maintained and monitored accurately.
Many truckers get into the trucking business every year – however, most of these new businesses fail for various reasons. Some of the most common reasons for startup business failure in the trucking industry are a lack of knowledge about funding methods for their business to remain successful and stay out of debt.
Knowing how to run your trucking company is the most essential part of starting a new business. Fortunately for entrepreneurs and small business owners, funding methods can help you stay on your feet when you feel like you are losing clients and losing resources.
To keep your vendors happy and your employees satisfied, you need a constant cash flow to pay people on time and avoid bad reviews and customers. Let’s see one of the best methods of maintaining strong business relationships between your management staff, your employees, and your clients.
What is freight factoring?
Freight factoring, also known as truck factoring, is a form of financing for trucking companies and transport businesses. Transport companies can use their invoices to obtain cash advances from factoring companies to pay for immediate expenses and costs.
- For example, if a trucking company’s unpaid invoices show Client A is supposed to pay $5,000 next month, they can obtain a cash advance on the spot to pay their employees and other clients. The cash advance will usually be between 70 and 90% of the total unpaid amount, so the trucking company can obtain between $3,500 and $4,500 on the spot.
How freight factoring works
Freight factoring is similar to obtaining a loan from the bank – accept it is much easier. Of course, there are positives and negatives to each form of getting money quickly, but freight factoring has numerous benefits that work for people who are in a tight bind and need money on the spot.
Freight factoring can provide trucking companies with cash almost immediately, instead of having to wait weeks – or even months – for a bank loan approval to go through in the system. If you need to pay a client by the end of the week, obtaining freight factoring can usually take between 3-5 days to get approval and get paid on the invoices.
Instead of using collateral or equity to ‘trust’ you and take you on as a client, freight factoring companies will use the reviews and the assets of those who owe you money to determine if they will pay you the money.
- For example, if Client A has a good reputation and monetary standing in the trucking world, the freight factoring company will agree to pay the freight factoring invoice. However, if Client A is untrustworthy and has a history of unpaid debts, the freight factoring business will not pay your invoices.
Pros and cons of freight factoring
Like anything in life, whether it be a product, business, or service, there are pros and cons to using specific methods – the same goes for freight factoring. Although it is similar to bank loans, it is different in many ways, such as the speed of providing cash, the approval process, and the interest rates.
Even though many companies prefer using freight factoring over bank loans, there are still some negatives about using this process. Let’s see this alternative funding method and why it can be considered a poor choice for some trucking businesses.
Pros of freight factoring
- Fast funding is the most significant advantage of using freight factoring as a trucking company. Instead of waiting weeks for bank loans to go through the system or gain approval, you can get cash in hand or in your account in a matter of 3-5 days, depending on the company.
- Questionable credit history will not harm your chances of approval by the freight factoring company. The only thing the company uses as collateral, or equity, is the reputation and credit of your assets. By evaluating your clients and their past credit history and payments, the freight factoring company will determine if they can cover your customers’ costs.
- You can quickly grow your business without concern about going into debt since you will have a steady cash flow. The catch 22 about starting a new business is getting clients. However, to get clients, you often have to spend money, putting you in debt and preventing you from delivering the client’s needs. With freight factoring, you can stay above the red line and also gain new clients.
- Since the freight factoring company has to collect from the clients, you don’t have to worry about using time and resources to turn into debt collectors for the unpaid invoices.
Negatives of freight factoring
Although there are many positives to freight factoring, you need to see both sides to make an intelligent decision and see if this is the correct funding method for your business.
- The agreement between a business and a freight factoring company is free, meaning the later fees can be expensive. Ensure that you can cover the transaction costs, so you don’t lose money in obtaining cash flow and paying clients.
- If your customer doesn’t pay, it comes back to be your fault. Your freight factoring company can’t make a client pay, especially if the business has gone under or become bankrupt during the time of waiting for payment. If this is the case, you have to reap the repercussions of the client failing to pay the factoring company.
- You lose control over some of your receivables since the factoring company is in charge of communicating and dealing with your clients. Ensure you let your clients know the freight factoring company will be the middleman, so they are not surprised to be dealing with someone new.
- Some agreements involve sending all of your invoices to the factoring company, resembling a long-term commitment that can sometimes be daunting to new businesses.
Who should consider freight factoring?
As a business owner, you are the only one who can make the final decision to see if your business will reap the benefits of a freight factoring company or if you should find another funding method. For the most part, those with high-volume businesses who need constant cash flow to deal with the revolving door of clients can benefit from using freight factoring services.
If you are not sure if freight is right for you, you should ask yourself these questions to see the answers and determine if you will benefit from signing an agreement with a freight factoring business.
- Do your customers have credit issues that can lead you to be denied or have to pay the money to the freight factoring company yourself?
- If you find your customers have credit issues, the first thing you should do is obtain new clients. Since your customers are responsible for paying your invoices and paying your employees, a lack of on-time payments can cause severe issues with your business. To find new clients, consider using a freight factoring business to obtain cash flow, pay employees, and broadcast your services to the public.
- Do you have constant or intermittent cash flow? If so, is this harming your business and reputation?
- If you have intermittent cash flow, chances are this lack of income seriously hurts your business reputation and employee morale. Use freight factoring services to improve cash flow, pay employees on time, and pay vendors upfront. Not only will this improve your confidence, but it can improve your standing among other trucking companies.
- Are your customers paying the invoice, but doing so in a prolonged manner, sometimes after the mandated 60-day period?
- You need to make sure your clients pay within the mandated date on the invoice. Usually, customers pay within 30, 60, or 90 days, but if you find your clients are not paying within the time frame, use a freight factoring company to collect debts on time.
- Do you struggle to pay your vendors, clients, and employees on time?
- If you struggle to pay vendors and employees on time, use a freight factoring company to increase your cash flow and prevent late payments.
By answering these questions, you can make the decision as a business owner whether you should use freight factoring services to help fund your growing company.
By taking the time to do some research and see if your business is a good candidate for using a freight factoring business, you can increase your company’s productivity, cash flow, reputation, and client list.
Although using freight factoring has some risks, like giving up control, banking on your clients coming through with payments, and paying high-interest fees, the constant influx of money allows you to keep clients, pay vendors, and keep employees happy.