A Texas trucking logistics company filed bankruptcy in January listing up to $500 million in debt and only $500,000 in assets. The news followed that a California company with up to $10 million in assets also filed for bankruptcy. The most recent is another California company listing up to $10 million in debt and only $50,000 in assets. It filed bankruptcy without paying millions to trucking company owners and freight factoring companies.
When you’re running a trucking business, there’s always a risk of sudden closures and bankruptcies that keep brokers and shippers from paying you. There are, however, ways around it. Have you considered the benefits of freight factoring services and their potential when it comes to improving your cash flow?
Understand the Differences Between Recourse and Non-Recourse Arrangements
Freight factoring arrangements may be recourse, meaning you’re responsible for repayment if your client doesn’t pay. To protect yourself from a client’s sudden bankruptcy or closure, you want to look into a non-recourse arrangement. If your client unexpectedly files bankruptcy and leaves you with unpaid invoices, it’s not your problem. The freight factoring company takes the loss.
A non-recourse freight factoring agreement does have higher rates, but it’s also insurance against being left with nothing. If the factoring fee was 5% and you were owed $50,000, you’ve paid the factor $2,500, but you get to keep the other $47,500. It’s a small price to pay for peace of mind.
How Freight Factoring Works
You’ve just completed a job for a client. They owe you $20,000 for that run. Typically, you’d return to the office, hand your bill of lading to your office staff, and they’d generate the invoices, mail or email them to your client, and wait for payment. If payment doesn’t arrive within the allotted number of days, you have to then make calls and start pushing to get paid. You could end up having to take them to court to get paid or send the account to a collection agency. It’s a lot of time and work.
With freight factoring, you haul the load and send the bill of lading to the factoring company. They process it, deduct the freight factoring fee, ACH fee, and any other agreed-upon charges, and pay you some or all of the balance. It could be 100%, but some factoring arrangements pay 90% or 95% first and wait until they’re paid before you get the rest.
Suppose you have a 3% factoring fee and a $3 ACH charge for sending the money to your bank. A 3% fee on $20,000 is $600, plus there’s the $3 ACH fee to consider. You’re due $19,397. However, you only get paid 90% now. You’ll get the rest when your client pays. That means, $17,457.30 goes into your trucking business’s cash flow after you submit the request and it’s processed. Now you wait. Once your client pays the invoice, you get the remaining $1,939.70 at that time.
That’s a basic breakdown, but there can be other fees. Every freight factoring company differs. One might charge you a small fee for every business credit report you pull. Another may charge a fee if you don’t submit enough invoices in one month. Some companies charge a sign-up fee for every new client you take on.
You need to go through a contract very carefully and make sure you agree with all of the terms. If any stand out as unfair, ask about them, and walk away if you’re uncomfortable. You should shop around to get the best freight factoring arrangement for your needs.
How Does This Improve Your Cash Flow?
When you own a trucking company, you have daily, weekly/bi-weekly, monthly, and yearly expenses that you need to pay on time. Your drivers’ wages are important. If you can’t pay their wages, you open yourself up to fines from the Department of Labor and possibly the federal government. You need to be able to pay for your trucks’ fuel fill-ups, repairs, and routine maintenance. Without those components covered, you won’t have trucks hauling loads, which is how you make money.
Each month, you have utilities, rent/building loans, truck loans, credit cards, etc. to pay. If you cannot pay those, you risk getting sent to collections, being evicted, or having your trucks repossessed. Late credit cards lead to late fees and higher credit card interest rates. Late fees and higher interest add up quickly, and soon you’re spending more money to stay afloat. Plus, the late payments hurt your credit rating.
Your credit rating is crucial when it comes to qualifying for things like business loans or truck loans in the future. Poor credit ratings make it harder to secure these loans. If you can get one, the interest rates will be much higher than you can easily afford.
When you factor your trucking invoices, you get paid immediately, which makes it easy to pay bills on time. You enjoy additional benefits that help increase the money you save each month. Those savings build a strong cash reserve, and that’s essential for growing a healthy business.
While you are paying a freight factoring fee, it’s far less than the interest rate you’d get on a business credit card or through a business line of credit. Plus, a freight factoring agreement isn’t going to end up listed as debt on your credit report. It’s not a loan, it’s a service.
Freight Factoring Comes With Other Perks
In addition to the relief that you’ve been paid and a sudden closure won’t impact your finances, you also enjoy several other perks with a freight factoring agreement. When you find a potential new client, you have an unlimited number of credit checks at your disposal. Run their credit check and make sure they have a solid history of paying bills on time and that they don’t have more debt than you feel is necessary.
With a partnership with TBS, you also enjoy savings of up to 90 cents per gallon with an EFS or Comdata fuel card. You can ask TBS to fund your fuel card at any point up to 11 p.m. (Central) and have money there for your fleet’s gas or diesel top-ups.
There’s also a handy TBS: Get Paid app that makes it easy to pull up real-time information on what’s currently being processed and what’s approved and available in your accounts receivable. You’ll always know where things stand. When you pick up or drop off a load, the GPS-based VeriFast™ system verifies you’ve picked up or completed a job, which makes it easy to submit a bill of lading for payment.
TBS has been in the freight factoring industry for over 50 years. We’ve seen many companies come and go in that time, but it’s our goal to help you grow and thrive. Reach us online or by phone to learn more about a non-recourse factoring arrangement. You could be set up and factoring invoices by tomorrow.