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If you operate a trucking company, then you are familiar with the many challenges associated with its finances, such as delayed payments or inconsistent cash flow. With that being said, there are options to solve these problems, such as a merchant cash advance or a factoring de carga service. These are both popular onions for trucking businesses to help advance cash flow and keep the business running smoothly in uncertain times. We’re going to dive into the differences between factoring services and merchant cash advance services to help you decide which one is safer and more reliable for your trucking business.
What is Factoring?
First, we are going to take a deep dive into factoring, what it is, and how it works for a trucking business. Factoring is when a trucking company sells its invoices to a factoring company for a cash advance, eliminating the need to wait 30 or 60 days for payment. This is the type of service that we offer here at TBS Factoring. Some of the advantages of factoring is the fact that it improves cash flow quickly, there’s no debt created, and it helps to scale business growth. On the other hand, there are a few drawbacks that could be associated with factoring. These drawbacks include small service fees or rate reductions, and there is a large dependence on customer worthiness with a factoring relationship.
How it works:
Factoring de carga is simple when it comes to the way it works, especially considering the factoring company handles all of the collections and credit checks, meaning that it makes the admin side of your business much smoother. Here’s a look at how it works to work with a factoring company like TBS Factoring:
- The trucking company starts off by delivering the freight and then submitting the invoice.
- The factoring company then receives the invoice and pays the trucking company a cash advance, usually about 80 to 95% of the full invoice amount.
- The remaining balance will be paid to the trucking company once the original shipper or broker pays the invoice.
What are Merchant Cash Advances (MCAs)?
Now, we’re going to look at what merchant cash advances are and how they work, so you can have a good understanding of what it is in comparison to factoring services. Merchant cash advances provide a lump sum of cash in exchange for a percentage of future sales or revenue. Some of the benefits that come with choosing MCAs are the fast funding, which is often between 24 and 48 hours. It’s also easier to get approved, even if you have lower credit. With this said, there are drawbacks such as high effective interest rates, which can sometimes even exceed 70 to 100%. There are also frequent deductions that can strain daily cash flow, and they create debt that grows quickly if business slows down. Lastly, it’s not regulated like traditional loans or factoring services.
How it works:
Merchant cash advances work a little bit differently from factoring, so we’re going to go over how they work and the steps to take when working with merchant cash advances. It’s closer to how a loan works than factoring, which is the biggest difference here.
- A trucking company receives a cash advance
- Repayment happens daily or weekly through automatic deductions from bank deposits or credit cards in order to repay the cash advance.
Factoring vs Merchant Cash Advances Breakdown
Here is a look at all of the main differences when looking at factoring and merchant cash advances.
Type of Funding
Factoring: Sale of invoices
MCAs: Loan against future sales
Debt Created
Factoring: No
MCAs: Yes
Repayment Structure
Factoring: Customer pays the invoice
MCAs: Daily or weekly deductions
Approval Based On
Factoring: Customer’s credit
MCAs: Business revenue or credit
Cost
Factoring: Small Factoring Fee
MCAs: High effective interest rate
Risk Level
Factoring: Low
MCAs: High
Why Factoring is Typically Safer for Trucking Businesses
When we look at the difference between these two options, there are a lot of considerations to look at. When it comes to the risk factor, merchant cash advances can pose a higher risk for trucking businesses, leading factoring to be the safer and overall better option in most cases. Here’s why factoring is a safer option for trucking businesses:
Predictable Cash Flow: Money comes in immediately when the invoices are submitted and there aren’t any surprise deductions.
Credit Protection: Your credit as the business is protected, as a factoring company usually runs credit checks on corredores and shippers.
Flexibilidad: Factoring is flexible and able to scale with your business, depending on how much freight is hauled.
No Debt: You will not accumulate any debt with factoring because of the way it’s set up, versus MCAs, which borrow against future income.
Back-Office Support: Factoring offers more than just cash advances; they help with handling collections, which can free up time for other admin tasks.
How TBS Factoring Can Help Your Trucking Business
En TBS Factoring, we are skilled in factoring and working with a variety of different trucking businesses and business sizes. Ultimately, we offer multiple factoring services that can help keep cash flow consistent and support your business. We offer fast approvals and same-day funding without the hidden fees or long-term contracts. We also do credit checks and collections handled for all clients to protect your safety and keep cash flowing. At TBS, our decades of experience allow us to help you maintain cash flow safely, without any risks to your business. If you are looking for a reliable factoring company to work with, Contacto or browse our website to see what we offer and if TBS Factoring is the right choice for you.
