Entrepreneurship is no easy task. Depending on the nature of your business, you are guaranteed to experience various challenges as you try to keep your doors open. To be able to counter any hurdles you might face, you need to maintain a steady cash flow.
Cash flow in a business refers to the money that’s flowing in and out of the business. It is a very critical part of staying in business and will determine the growth and performance of a company. Having a positive cash flow means you have more money flowing in than it is leaving.
When it comes to the trucking industry, cash flow is equally as important. Any trucking company will tell you they have at some point found themselves in a situation where they are unable to take on new loads or a lucrative contract because they lack ample cash flow.
Managing Cash Flow
Trucking companies find it hard to manage cash flow because of two reasons; late payments from clients and high operational costs.
Payments in the trucking business usually take 30 to 60 days, with some going for as long as 90 days. Remember, your business needs to keep running as you wait for clients to make their payments. Your trucks will need regular maintenance, fuel, and your drivers need their salary too.
How to Increase the Cash Flow of Your Trucking Business
1. Update Your Fleet
Making sure your trucks and equipment are in the best shape can help increase efficiency. Better efficiency is the key to higher profit margins. For instance, ELDs (Electronic Logging Devices) will help you ensure your drivers are operating your trucks during the set hours of service.
2. Cut Down on Unnecessary Costs
Try to find ways to eliminate business expenses that provide little to no value to the. business. Schedule a time every month to review your profit margins and operational costs. Saving that little bit of money can save you thousands of dollars in the long run that will give your business a real boost financially.
3. Leverage Truck Factoring
Factoring your invoices is the most ideal option for you and it can potentially save you both time and money in so many ways.
For starters, it can provide you the funding to use as working capital in no more than 48 hours. This is such a good incentive considering traditional lenders usually take weeks or even months to approve a business loan.
You also don’t have to pay any interest and it saves you from having to wait 60 or 90 days to receive payment for a transported load. Ultimately, with truck factoring, trucking business owners can sustain their companies by accessing funding that they can use to take care of operational costs.
Let’s take a deeper look into truck factoring and what promises it has for business growth.
What is Truck Factoring
Truck factoring is a highly popular financing option for truck business owners. It involves a carrier selling unpaid invoices for a load hauled for a client so that they can get instant cash rather than wait for the 30, 60, or 90 days for the client to pay. The trucking factoring company then collects the payment at the behest of the carrier.
Also referred to as freight factoring or transportation factoring, this service helps trucking companies maintain a steady cash flow, especially new trucking companies that have recently taken up a ton of costs starting up their businesses.
How Truck Factoring Works
The process begins when a carrier issues an outstanding invoice to a client for services provided. The invoice involved is the basis for the entire factoring process so it has to be present.
The carrier then signs up with an invoice factoring company if they haven’t already and assigns the invoice to the factor. The carrier has the option of taking up low volume factoring or larger volume factoring.
Larger volume factoring, also known as contract factoring, requires the carrier to sell all their invoices to the factoring company for them to collect. But low volume factoring, or spot factoring, works as a line of credit where the carrier chooses what invoices to factor. The arrangement in both situations may differ depending on the terms provided by the factoring company.
Once the carrier has selected the invoices they want to be factored, the factoring provider proceeds to buy them.
The money the carrier receives for the invoice depends on the advance rate you agree to with your factoring company but it’s usually between 80% and 90% of the total amount detailed in the invoice. If the carrier has just registered with the factoring company, the first deposit may take a couple of days but any payments after that are usually made within 24 hours.
The factoring company then collects the payment of the invoice from the carrier’s customer. Before forwarding the carrier the remaining payment, the factoring company, however, deducts their fees from the customer’s payment.
Benefits of Invoice Factoring to Trucking Companies
Whether you’re just starting out in the trade or have amassed an empire of a hundred trucks, invoice factoring can help your business reach new heights by putting the money you need to grow in your hands instantly.
Here is a breakdown of the benefits you can expect from truck factoring.
1. Quick, Instant Payment
Unlike traditional lending arrangements, you don’t have to wait 30 days to get paid, or worse, find out that you didn’t qualify for a loan in the first place. The fast payment means you get your money in good time so you can resume business operations as normal.
Knowing you’ll be paid within no time gives even the busiest of managers a much-needed peace of mind because they won’t have to stress about where they’re going to source the funds they need for the company.
2. Helps Sustain a Positive Cash Flow
Running a trucking company means you need to have a steady cash flow ready for immediate use to cover unforeseen expenses. For instance, one of your trucks might break down during delivery or you might find you’re running out of money meant for fuel, pay salaries, or service your truck.
Invoice factoring can help you maintain a consistent cash flow by providing you with immediate funding so you can keep your wheels moving.
3. Helps Carriers Take on More Loads
Having a positive cash flow thanks to truck factoring means you can take on more clients than you might have otherwise struggled to do. It gives you the ability to fuel your trucks, invest in more drivers, or expand your fleet so you can transport more loads.
Ultimately, your trucking company will begin to grow at a very fast rate because you chose to factor your invoices.
4. Outsourcing the Debt Collection Aspect of Business
By factoring your invoices, you won’t have to worry about you or your office staff following up on invoice payments from your clients. The factoring company you work with will handle invoice follow-ups and collections so you can fully focus on making your business more productive and profitable.
It is, however, good business practice to notify your clients that you are selling their invoices so they can be aware of the situation and where to make their payments.
5. Protects the Carrier From Bad Debts
One highly underrated advantage to truck factoring is that it protects the trucking company from bad debts. Sometimes, clients struggle to make their payments on time or they even go out of business without fulfilling their payments. This can be a very inconvenient situation for a carrier especially if the amount owed is considerably high.
As a solution, some factoring companies provide non-recourse factoring where if a client fails to make payment for a transported load, the factoring company takes the responsibility for the loss.
With recourse factoring, the carrier is meant to buy back the invoice from the factoring provider if the client defaults on a payment. Non-recourse factoring companies, however, charge more in fees since they assume a higher risk.
It Takes Money to Make Money
Running a trucking business isn’t for the faint-hearted. It has plenty of challenges ranging from high full expenses, trucks breaking down every now and then, all the while recording low-profit margins. It’s one of those businesses that you have to live to love.
You might have a high margin of profit but if you have low cash flow, you might still have problems like having excess trucks such that some are non-operative. But with truck factoring, depending on the size and needs of your company, you can ease a lot of stress that you experience from the challenges of running a trucking business.
Invoice factoring will help your business maintain the cash flow that you’ll need to service or expand your fleet, pay your drivers, buy fuel for your trucks, and take on more business. It will also handle the payment collections so you can fully focus on hauling more loads and growing your business.