Owners of trucking companies face unique challenges due to the unpredictable nature of the industry. The most significant challenge is waiting for payments. In most cases, it takes weeks or months to receive payments from clients. This can lead to massive cash flow problems and prevent the business from growing. This is where truck factoring comes in.
What is truck factoring?
Technically, truck or freight factoring means that the trucking company sells outstanding invoices or freight bills of lading to a factoring company. This converts the company’s accounts receivable into cash. The standard waiting time for payment processing to trucking companies and drivers is about 40 days.
However, instead of waiting around for a client to pay the amount, a trucking company can get the same amount from a factoring company within a shorter duration. This is done at the expense of a service fee. Also, the payment made through factoring might be a bit less than the actual total owned for the transportation job. However, the payment is pretty quick. So when payments for a cargo are not made on time, factoring can tide trucking companies over by paying for operation costs.
How does it work?
The process of invoice factoring is not complex. It involves a series of transactions among three parties: the trucking company, the client, and the factoring company. This is how factoring works:
- The client needs a cargo to be delivered from one location to another.
- The client will hire a trucking company for this job. The trucking company will carry out a credit check with a factoring company. This is done to check whether the client’s cargo is eligible for factoring services.
- If the cargo is eligible, the trucking company will send the paperwork along with invoices of the cargo to the factoring company.
- The factoring company will process the paperwork and purchase the invoice, and will send the payment over to the trucking company.
- Over a period of time, the factoring company will directly collect the payment of the invoice from the client.
Why is factoring needed?
A trucking company may need factoring for various reasons. From keeping the budget afloat to holding up operational costs, factoring is often a lifesaver for many small to medium trucking companies. Here are some of the many reasons why factoring is essential:
- Small trucking companies that have just started out will need cash upfront to pay for fuel, toll, and other expenses. All these need to be managed before they receive payment from the clients. Factoring can help in covering these income gaps.
- Many small trucking companies often don’t get loans from banks due to various eligibility factors. Moreover, the interest on bank loans can accumulate over the years, making it difficult for such small freight companies to make payments on time. Factoring for trucking can be useful in such instances.
- The invoice payment cycle usually ranges from 30 to 90 days. Sometimes it can be a hassle to manage client invoices and payment collections. With factoring, a trucking company gets paid upfront, so there is no need to manage accounts payable or bring in additional staff to manage the finances.
- With factoring companies, trucking service providers can get access to on-demand cash. When business is growing and immediate cash flow is required to hire new drivers and buy new equipment, factoring can provide the required cash. Instead of waiting on the client invoice, a trucking company can pay drivers and employees in advance with the procured money, and keep the ball rolling.