One key challenge in trucking businesses is inconsistent cash flow. This can be caused by fluctuations in demand, high overhead costs, unreliable drivers, heavy repair and maintenance costs, expensive taxes, and long payment delays. Typically, it can take 30, 60, or 90 days before you get the cash after delivering goods. Freight factoring is an excellent solution to such payment delays by providing quick access to funds, enabling you to keep operations running smoothly. Statistics show that 38% of businesses fail due to exhausting their cash reserves or failing to secure more capital. You wouldn’t want your trucking company to go down the same route. (1)
This guide explains freight factoring, its benefits to truckers, and reasons to take this approach.
What Is Freight Factoring?
Freight factoring is a financial transaction that turns your freight invoices into immediate cash. As mentioned, payments for truck deliveries can take several weeks or months. So, instead of waiting for this long, a factoring company pays you the amount you’re expecting, minus a small percentage.
Another fast payment option is quick pay, which involves working with a broker or shipper to earn payments. Such arrangements typically take between two and 30 days because you don’t sell your invoice. In contrast, factoring payouts are done immediately.
One of the benefits of using a freight factoring service over a quick pay broker is that the former will focus on getting you high-paying freight rather than just focusing on getting you to drive their next load.
The Role of Factoring Companies
You may never know exactly when a freight broker or shipper will pay. Freight factoring companies, also referred to as factors, come in handy at this juncture. They eliminate the typical worry of waiting for money while you have urgent bills to settle.
The Freight Factoring Process
Below are the fundamental steps to the freight factoring process:
- Deliver the load: The first thing is to pick up the load, deliver it, and get all paperwork signed.
- Submit the paperwork: Next, present the invoice, rate confirmation, and bill of lading to the factoring company. These documents are proof that there are no freight claims or other issues preventing payment. The factor will also evaluate the creditworthiness of the trucking company’s customer to gauge their probability of paying.
- Get paid: The factoring company will give you an advance payment, usually within 24 hours, at the agreed freight factoring rates. The cash will be deposited directly into your bank account or applied to your fuel card if you wish so.
- Factor collects payment: Finally, the factoring company collects payment from the owner of the goods that were delivered. This includes follow-ups and negotiations.
- Paying remaining balance and fees: After the customer pays the full amount, the factoring company deducts its fees and any reserve amounts held. They then remit the remaining balance to the trucking company.
As you can see, freight factoring is pretty straightforward.
Benefits of Freight Factoring
Why should trucking companies care about factoring? Below are some solid reasons:
Improved cash flow:
The most obvious benefit of freight factoring is improved cash flow. Factors give truckers immediate access to cash, ensuring they can meet their operational expenses, such as fuel, payroll, and maintenance. Undisrupted cash flow helps ease the supply chain problems. As of 2021, there was already a shortage of 80,000 truck drivers, which was projected to rise to 160,000 over the next 10 years. This considerably disrupts the supply chain. So, dealing with more manageable issues, like cash flow, can help. (2)
Reduced administrative burden:
Factoring companies manage invoicing and collections on behalf of trucking companies. You understand that following up customers for payments can be stressful and time-consuming. Thus, outsourcing these tasks relieves you of some administrative tasks, giving you time to concentrate on core business aspects.
Enhanced creditworthiness:
Freight factoring relies on the creditworthiness of the trucking company’s customers, not the company itself. This is advantageous. A small or less creditworthy company may find it challenging to get traditional funding. Thus, freight factoring comes in handy because it doesn’t consider the company’s credit status.
Growth possibilities:
Having ready cash is essential in the dynamic trucking industry. Investment opportunities can show up any time, and if you have the cash, you can take advantage. You can expand your fleet when you come across a good deal. You can also quickly hire new drivers when the need arises. The average trucking company has a turnover rate of about 95%, meaning you have to replace employees every now and then. And in case you’re involved in an accident, you can quickly bounce back to your feet. (3)
Protection from missing payment:
Some customers may willfully refuse to pay. Others can go bankrupt suddenly, making them unable to pay. Factoring companies provide a layer of security against these payment woes. They first do a thorough credit check so you can choose only those customers with a high probability of paying. And should anything go wrong, the factoring company takes it upon themselves to mediate the situation.
The benefits of freight factoring are evident. Although you lose a small percentage of the payment, the benefits are worth it.
Conclusion
Freight factoring helps trucking companies get cash immediately after delivering goods instead of waiting for several weeks or months. Your winning point is choosing a reliable freight factoring company because not all are the same. So, before finalizing your decision, read as many reviews as possible from your prospects’ previous customers to understand what their experience was like working with such factors.
Also, take time to understand what you’re signing up for. Confirm details like contract terms, volume requirements, recourse vs non-recourse options, and reserve funds. Ultimately, you’ll enjoy prompt payments, they key to running your trucking business without hitches.
References
- Small Business Statistics Of 2024. Source: https://www.forbes.com/advisor/business/small-business-statistics/
- How will the US deal with a shortage of 80,000 truckers? Source: https://www.bbc.com/news/business-59136957
- The Real Reason America Doesn’t Have Enough Truck Drivers. Source: https://www.nytimes.com/2022/02/09/business/truck-driver-shortage.html
