Financing for Small Fleets: Why Freight Factoring Is a Must

Between January and April of 2023, more than 31,000 fleets quit the business. Of those, 24,806 were one-truck owner-operator trucking companies. While the market soared not too long ago, spot rates are down almost 70 cents per mile in certain segments, and it’s making it hard for small fleets to survive.

When COVID put the world on hold, the trucking industry exploded with increasing demand to get goods to consumers. Rising interes rates and a higher cost of living slowed spending, and that’s trickling down to the trucking industry, which suddenly has fewer loads to haul. Supply and demand always have a trickle-down effect, and small fleets are feeling the effects of those increases and declines.

When you’re trying to finance your small trucking company, freight factoring is the smart way to keep money flowing. If you can’t afford to fill your truck’s fuel tank, pay for necessary repairs, and keep up with bills, you’re going to fail. While you might know you’ll have the money in 30 or 60 days, the license you need to stay on the road isn’t going to wait. That’s one of many reasons why you need to look into freight factoring.

The Benefits of Freight Factoring

Freight factoring’s most important benefit is the improved cash flow you gain. When you have clients that take 30 or 60 days to pay, you have to float your bills for that month or two. It’s stressful, and your creditors don’t care about your problems. They’ll slap on late fees and interest charges. Plus, if you pay a bill more than 30 days late, it will show up on your credit report and drag down your credit score.

A low credit rating leads to higher interest rates on things like truck loans, business credit cards, and business lines of credit. If you rent, it can make you less appealing to property managers and owners of business space and warehouses. A low credit rating hurts your business by driving up costs.

If you cannot afford to fuel your trucks, you can’t take more work. That also hurts. Keeping up with your expenses is the only way to keep a business afloat and outshine the competition. That’s the biggest benefit to freight factoring, but there are others.

Improve Your Company’s Credit Rating

Paying bills on time is one way to improve your business credit score. Building up your assets also helps. As your drivers complete work for one client, you can use services like free business credit reports to carefully research available loads with new clients. You can weed out brokers and shippers who pay bills late and start expanding your client load. 

Reduce Your Employees’ Administrative Duties

How much time does your office staff spend chasing down late payments, generating and sending out invoices, and processing checks that have been received? When you work with a freight factoring company, you reduce these time-consuming tasks.

Your office staff has time to focus on other work responsibilities because the factoring company takes over the invoices, collections, and payment processing duties. You don’t have to sit on the phone demanding clients pay overdue bills anymore. You and your staff can use the extra time on marketing, scheduling, hiring, training, and licensing paperwork.

Gain Beneficial Fuel Discounts

People don’t always realize that freight factoring comes with perks like fuel discounts. How much money could you save each week, month, and year by factoring invoices? You’ll gain substantial discounts on each gallon of diesel or gas.

The savings you gain are a good way to keep building up your savings to have cash to pay for repairs or to grow your fleet with new trucks. It will take time, but it’s better than losing money to late fees and higher interest rates.

Enjoy the Flexibility of Customized Arrangements

Freight factoring is flexible, and it’s not a one-size-fits-all arrangement. You might prefer to have all of your clients’ invoices factored, or you might want to pick and choose which are and which aren’t. You don’t have to be locked in with every client if it doesn’t fit your needs.

Are There Drawbacks to Freight Factoring?

Life is full of pros and cons, and freight factoring has a few, but they’re manageable. In exchange for immediate payments of the money you’re owed by a client, a freight factoring company charges a fee. Typically, freight factoring fees fall into the 1% to 5% range, so it’s still significantly lower than credit card or line of credit interest rates.

Some freight factoring companies add fees like start-up fees, application fees, credit report fees, etc. When you’re choosing a freight factoring company, make sure you ask about hidden fees to ensure you have a complete picture of what you’ll be paying.

Current business line of credit rates are around 9% with Bank of America and 10.25% with Wells Fargo. That’s the starting rate, they can go much higher if you don’t have exceptional credit. The government’s SBA loan rates have also increased a lot in the past few years. As of February 2024, rates range from 11.5% to 15%. All of those loan products are far higher than the freight factoring rate. 

Plus, a freight factoring arrangement doesn’t impact your credit score. If you can’t repay your business loan, it’s going to appear on your credit report. Freight factoring isn’t a loan, so it won’t impact your score. While you are paying freight factoring fees, consider how much lower they are in comparison.

There is a risk of having to repay what you were advanced. If your broker or shipper doesn’t pay their invoice on time, you could be held accountable for the repayment of the money you received as an advance. However, there are ways around that. Non-recourse and recourse factoring are important considerations.

How Much Risk Do You Want to Take On?

With any freight factoring arrangement, someone has to swallow the loss if the broker or shipper doesn’t pay. This is where you need to consider the pros and cons to recourse and non-recourse arrangements. 

A non-recourse arrangement means if the client doesn’t pay due to their issues with credit or funding, the freight factoring company covers the loss. It protects you against having to give back the money you received from the factor. But, the fees for non-recourse arrangements are higher. 

Recourse arrangements require you to pay back money if your client doesn’t pay their invoice. The fees are lower because you take on the risk. That often requires you to set up a reserve account with the freight factoring company. There are pros and cons to both options, but it can be better to have non-recourse arrangements when you have a small fleet as it’s an extra layer of insurance against unexpected closures or bankruptcies

TBS has been helping trucking company owners keep a strong cash flow for over 50 years. A quick form is all it takes to start getting paid the same day

With our freight factoring arrangements, enjoy extra benefits like no sign-up fees, free online credit checks, fuel discounts, and fuel advances. Why wait 30 or 60 days to get paid? For a low fee, you could get same-day cash and have a constant flow of cash by partnering with TBS.

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