In the busy trucking industry, large fleets need a lot of fuel to run their engines, but the business also needs to be fueled by revenue. Waiting weeks or months for your invoices to get paid is damaging to any business, and it doesn’t matter if it’s a new company or a well-established one. A lack of cash flow can cripple your company.
That’s where freight factoring is so crucial to business growth. Freight factoring provides you with the tools needed to grow your business, ensure a steady revenue flow, and handle many aspects of your office and administrative work. Freight factoring is an easy and cost-effective way to maximize your business’ potential.
Understanding Freight Factoring
Freight factoring is an arrangement where a freight factoring company purchases outstanding invoices from your trucking company, but they’re purchased at a discounted rate. Usually, the rate is around 1% to 5% of the invoice’s value, and it’s often referred to as the factoring fee. Your company receives immediate payment of some or all of the amount owed, minus that factoring fee.
Depending on the arrangement, that advance from your invoices could be 100%, but it might be a smaller percentage. If you only get a percentage upfront, the balance is paid once your client pays the invoice. Meanwhile, the freight factoring company takes over the collection of the money due from your shipper or broker.
If your shipper or broker fails to pay the invoice, you could be forced to repay the amount you received from the factor. With a non-recourse arrangement, you’re protected if the broker or shipper goes insolvent or files bankruptcy, which offers a level of protection against events that are out of your control.
Take a closer look at how freight factoring works. Imagine your drivers completed three deliveries for your broker during the first week of the month. The invoices due are $7,000, $10,000, and $8,000. You’re owed $25,000, but that broker doesn’t pay invoices until the end of the month. You have four weeks before the invoice gets paid, and then you have to wait for the payment to clear your bank.
Meanwhile, you have wages to pay, one of your trucks breaks down and needs repairs, and yearly licensing and permit fees are due before the month ends. You need the money ASAP. Your options are to charge things on your credit card and deal with the exorbitant interest rates, reduce the amount of work you take on until you get paid and can afford the truck repairs. To do that, you might have to lay off a driver, and you hate that idea.
Freight factoring pays you now. If you had an arrangement to get 95% now at a 3% fee. If you take out the 3% fee, you’re left with $24,250. The arrangement is for 95% now, so you’d get $23,027.50 right now. That leaves a balance of $1,212.50 that’s paid when your client pays the invoice.
How Freight Factoring Helps You Grow Your Business
With the money you receive from the freight factoring company, you have a constant flow of cash. That’s key to growing your trucking company. You have the money you need to pay your workers’ wages, license and insurance fees, loan payments, credit card bills, and fuel fill-ups. When you pay these bills on time, you avoid late fees and dings on your business credit report. Freight factoring:
- Creates a steady cash flow: You know when you’re getting paid and no longer face the uncertainty if your client will pay on time or days or weeks late.
- Ensures you have the money for expenses: At a bare minimum, you need to have cash available for payroll, taxes, wages, insurance, licensing, permits, tolls, utilities, and rent/business loans. If you can’t cover those standard expenses, your business could quickly get into trouble.
- Invests in your company’s growth: Helps you expand your fleet, maintain the quality and condition of your current equipment, and allows you to take on more business without worrying about the startup funding.
Those benefits help all trucking company owners. Freight factoring is especially useful for large fleet companies for several other reasons.
- Better discounts: When you have a large fleet, your trucks need their tanks filled, and that gets costly. Freight factoring opens the door to discounts on your diesel and gasoline purchases, and those discounts give you extra revenue. You also have more money for upfront payments on equipment, and you save a lot when you pay cash over taking out a loan.
- Employees are happier: When you have a lot of workers and fail to pay them on time, it affects employee morale. Unhappy employees are more likely to leave for a competitor, and if one employee leaves, there’s the risk that others will follow.
- Insurance against non-payment: With a non-recourse agreement, your large fleet trucking firm is protected against brokers or shippers who file bankruptcy or suddenly shut down before they’ve paid you.
- Lowers the risk of poor credit: Paying bills late by a day or two may not harm your credit rating, but a month or more can create headaches that trickle into how easy it is to get credit, how low an interest rate you get, and how much of a credit risk you appear to be. A bad credit rating may make you unappealing to brokers and shippers with more work or higher rates.
- Reduced office work: You have a team in your office who spend too many hours trying to track down payments, keep up with invoicing and data entry, and process payments. It would be nice to free up their time for other tasks like marketing your business, finding more work, and scheduling drivers. With freight factoring, you no longer deal with invoicing and tracking down payments. You just upload the invoices the factoring company generates to your software.
Choosing the Right Freight Factoring Partner for Your Large Fleet
A quick search of freight factoring companies is likely to result in dozens of companies. With so much competition vying for your business, how do you choose the best one? Consider these factors.
- How do you reach customer support? Is the service available 24/7, or are you limited to certain hours and days?
- What are the rates and fees? Are there any hidden charges?
- Does the company have a positive reputation and years of experience? Are they experienced in the trucking industry or do they only have general factoring knowledge?
- Does the company have a strong financial history and the stability needed to handle your fleet’s volume?
- What technology do they offer for submitting payment requests, uploading documents, and getting paid? Additional services like load finding, load tracking, and free business credit reports are beneficial.
Large fleet factoring is not a one-size-fits-all financial solution. Make sure you take a very close look at your fleet’s strengths and weaknesses. Thoroughly investigate different freight factoring companies to ensure you’re finding the best fit for your needs. When you take your time and carefully assess freight factoring partners, you have a beneficial tool that ensures the success of your company.