Freight factoring is a fast-growing trend with owner-operators, large trucking companies and everyone in between.
That’s because one of the biggest challenges to growing a trucking company at every level is maintaining positive cash flow. From the time an owner-operator delivers his/her very first shipment, they’re fighting, scratching and clawing to keep money coming in.
In fact, according to Bloomberg, 8 out of 10 of entrepreneurs who launch businesses fail in the first year and a half. That’s a disheartening 80%…in the first 18 months, alone!
But why do so many fail?
Experts and entrepreneurs unanimously agree that it comes down to one thing – lack of CASH FLOW. They simply don’t have enough money coming in fast enough to support the weight of their fixed and variable costs.
Therefore, cash flow is the number one determining factor of small, medium AND large business success. When the money goes upside down, it’s a wrap.
Which leads us to the power of ‘Freight Factoring.’ This strange term that you may never have considered could be the KEY to accelerating your fleet growth to speeds that would make Jeff Gordon blush.
So, let’s dive in and learn more about this strategic cash flow resource.
Freight Factoring Defined
The big challenge most trucking companies face in regards to cash flow, whether an owner-operator or corporation with 300 trucks, is cash flow. Accounts receivables are commonly paid by customers 30, 60, and 90 days after the work is completed!
So, fleet owners are left with some impossible math. They must pay their labor force today…pay their gas bills today…pay their truck loans today…but can’t expect to be paid in return for all their expenditures for 3 months?
The entire season may have changed before a fleet owner gets paid for work his drivers did, back in the day! That’s a cash flow crisis situation that stagnates growth, at best. At worse, it can suffocate some companies that don’t juggle their money just right.
Freight factoring. Also called trucking factoring, freight factoring is a method of converting your accounts receivables on work you’ve completed into cash, now. Financial firms offer this service where you sell your outstanding invoices to them and they take over these assets and pay you upfront.
So, you’re basically converting your outstanding invoices into cash today.
There is ‘contract factoring’ – which factors all of a trucking firm’s invoices, and ‘spot factoring’ – which factors selected invoices on the spot.
How Freight Factoring Works
Let’s take a look at how this works.
Let’s say you have an invoice of $10,000 coming in 90 days from a dependable customer you do a lot of business with. In order to get your money this week instead of three months from now, you can sell this outstanding invoice to a factoring finance firm.
Most factoring companies pay 80% to 90% upfront, and the remaining balance of the invoice, minus their service fees, when they collect on the invoice from your customer.
So, instead of waiting three months from now to get $10,000, you sell the invoice to a factoring company and they pay you $8,000 – $9,000 upfront. Ah…oxygen…we can breathe again.
Now you have money to pay your bills, pay your drivers, and…live!
Then, 90 days from now, the factoring finance firm collects on the invoice from the client, so they pay you the rest of your invoice amount, minus their fees.
Do you see how this streamlines your cash flow?
This scenario works for an owner-operator with less than $30,000 a month in invoices as well as larger fleet owners who want to collect on over $200,000 in outstanding invoices for the month.
With this cash flow tool, you can afford to take on additional work, hire additional drivers, and purchase new equipment to grow your business faster than ever before.
Who’s Ideal for Freight Factoring
Freight factoring is equally used by owner-operators who want to get money in hand soon, not later, for work they’ve completed, so they may take on additional work and keep growing.
Larger trucking outfits use freight factoring to outsource their accounts receivables and to collect much needed cash on outstanding invoices for working capital.
You are considered to be low-volume factoring company if you have under $30K a month in outstanding invoices and high-volume factoring company if you have anywhere between $30K and $20M a month in accounts receivables.
Freight Factoring Terms & Conditions
First off, to qualify for freight factoring, unlike many other financing options, you just need a credit score of 530 or higher – if needed at all. Why is this? Because you’re not the one the factoring finance firm is collecting from – they’re collecting from your customer. So then, the factoring company will consider the creditworthiness of your customer(s) from whom they will collect on these outstanding invoices.
Some finance firms like you to have 2 or 3 years in business while others don’t specify.
The fee you will pay is called a ‘discount rate,’ which starts at .25% per week. Companies typically charge .5% to 5% a month in fees for the service.
You may additionally pay a one-time origination fee.
Freight factoring streamlines your cash flow by offering quick invoice turnaround, which gives you the money you need to grow your business faster. And since qualifying is easy for many truckers int’s no wonder large and small trucking companies are turning to this cash flow tool.
On the other hand, this fast money does come at a price. In our example above, if you factored your $10,000 invoice and paid a 3% discount fee, you’d receive a total of $9,700. And if the customer doesn’t pay the factoring finance firm, the cost increases.
All in all, you should consider freight factoring as a way to streamline your cash flow for survival and business growth.
Need a better understanding of what your potential monthly profit could look like? Use our free budget builder tool in the following situations:
- Before you buy anything.
- If you are thinking about upgrading your equipment.
- If you are going after a new contract and need to buy more equipment to fulfill the contract.
- If you are thinking about raising your prices and want to see the impact it will have on your profits.
About Commercial Fleet Financing, Inc.:
At Commercial Fleet Financing (CFF), our pros have given smart advice to fleet owners and owner-operators in the transportation, moving, towing or construction industries for more than two decades. With CFF, finding the right financing solutions is a phone call away and most borrowers secure commercial vehicle financing with ease. To talk directly with one of our finance pros and get started with a credit approval in as little as two hours, CFF’s phone number is (469)-281-2962.