Clerical Staffing Agency
IT Staffing Florida
One of the more frustrating aspects of managing a trucking fleet in today's economy is that you could have the best routes, and the most profitable hauls, and yet still close your doors due to bad cash flow. In fact, no matter what type of business you are running, cash flow is guaranteed to be a hot button issue. This is especially true in this economy, one where large banks, credit unions and private lenders are less and less willing to provide credit to small and medium sized trucking fleets. The issues are obvious: Either your company secures credit, or it suffers under the weight of increased financing and a poor cash position. However, there is a solution for today's trucking companies and it comes from using an asset-based financing option that allows today's trucking companies to improve their cash positions, lower their financing and better manage their fuel cards. That solution includes lowering financing costs by using receivables factoring.
The New Reality of Business Financing
The global financial crisis of 2007 directly impacted the credit markets. Once the recession hit, many banks immediately started pulling back on business credit lines and bank loans. In response, the Federal Reserve initiated a series of quantitative easing measures, all in the aim of reducing interest rates by increasing the money supply. The process of quantitative easing is easy to understand. The Federal Reserve purchases mortgage backed securities from banks by directly depositing capital into the banks' accounts. The interest rates charged by the Federal Reserve are incredibly low. Those interest rates are currently at a quarter of a percent. The idea is that banks will want to achieve a higher rate of return by lending money to businesses. Unfortunately, this hasn't happened as much as small trucking fleets need it to. As such, financing is still hard to come by and still hard to manage. So why is business credit so difficult to secure for today's trucking companies?
What Does it Take to Secure a Bank Loan?
Today's trucking companies must be able to provide all three financial statements if they want to secure credit from a bank. This includes providing an income statement, a balance statement and a cash flow statement. Given the risk in global credit markets, a number of banks have insisted on seeing consistent returns and performance from applicants. Therefore, it's not uncommon for banks to insist on see solid performance over a three to five year span. Only then are they likely to advance credit. Unfortunately, a number of trucking companies don't pass the aforementioned litmus test. Why are today's trucking companies unable to meet these criteria?
• Stringent Criteria: The most obvious flaw with the above mentioned criteria is that a large number of established trucking companies haven't been in business long enough to show consistent returns. For instance, how can a start-up secure capital when it can't possibly provide three to five years of consistent returns? It simply isn't possible. In fact, it's not just start-ups that are affected. A trucking company could have a long and storied history and yet still lose out because it has come across a couple of bad years. These aforementioned criteria immediately close the door on a large number of small trucking fleets.
• Cash Flow: The overriding issue is cash flow. Trucking companies have become accustomed to customers delaying invoice payments. It's not uncommon for customers to take 60, 90 or even 120 days to pay their bills. Therefore, if cash flow is a going concern for trucking companies, then how can they possibly provide a cash flow statement that's good enough for banks to advance them capital? It simply isn't possible.
• Bank Financing is Difficult to Manage: A bank loan immediately appears on your balance statement. However, receivables factoring won't appear as a loan on your balance statement. Factoring is an advance on the value of your receivable. Therefore, when you apply for business credit, one of the criteria the bank bases its decision on includes your balance statement. If you have outstanding loans and business credit lines, then you are less likely to secure additional credit. It's just that simple.
• Bank Credit is Based on Your Credit History: Finally, your ability to secure bank financing ultimately comes down to your credit history. If your history is less than spectacular, then you are less likely to secure credit. However, receivables factoring is completely different. The decision to lend you money isn't based on your credit rating. Instead, it's based on the account debtor's ability to pay the receivable. In essence, the factoring company will advance you funds if your customer has a history of paying their bills.
In response to the lack of viable credit sources, a number of small and medium sized trucking companies started looking at alternative financing options like receivables factoring. For some trucking companies, it was a matter of complimenting existing financing with alternative solutions. This allows them to maintain a positive cash position by relying upon conventional bank financing and an alternative asset-based solution. However, for others, receivables factoring has become their sole source of credit. These companies see factoring as an easy-to-use, easy-to-manage source of credit. So what makes receivables factoring so interesting for today's trucking companies? More importantly, how does it compare to conventional financing?
Understanding Receivables Factoring
Like all businesses your trucking company has a number of valuable assets. These assets can be used to secure the capital you need to finance your business. In essence, these assets can be used as collateral in order to secure the capital you need to run your operations. So what might some of these assets include? First, your trucking company might own its warehouse or its building. Second, your entire trucking fleet is considered an asset and one that can be used to secure credit. Finally, your receivables are considered assets. It's these receivables that form the basis of receivables factoring by allowing you to secure the working capital you need to finance your business. Instead of waiting for your customers to pay their bills, you'll use receivables factoring to secure the money you need to run your operations, support your fuel cards and pay creditors and vendors. Factoring Companies for trucking specialize in funding receivables for the transportation industry.
1. How Does Receivables Factoring Work?
The process of receivables factoring is very straightforward. First, you sell your receivable to the financing company. They then advance your company capital based on the value of your customer's outstanding invoice. This advance is typically 90 percent of the value of the receivable. You secure the capital you need to finance your operations, pay carriers you've subcontracted work out to and cover your day-to-day operating expenses. Most importantly, your trucking fleet can prepay its fuel cards, thereby covering the costs of long hauls and loads before they leave your dock.
A working credit line is established where each new receivable is used to secure the capital you need to finance your operations. All you need to do is provide the financing company with the name of your customer and their location. This information is best provided in advance. The financing company will then review your customer's credit rating. If your customer has a solid credit rating, then the money is advanced to your account.
2. How Much Does Receivables Factoring Cost?
There are essentially two costs to factoring. First, there is an administration fee that is charged directly to the value of the receivable. This administration fee is often 1 percent or less. Second, the effective interest rate is charged against the amount of the upfront advance. In this case, the effective rate is charged against 90 percent of the receivable's value. Third, the effective rate has two components. One of these includes an interest rate and the other includes the going prime rate. However some freight factoring companies will charge a flat fee where it includes both admin fees and interest all in one fee to make it easier, others may spit the fee as the outstanding balance continues to accumulate.
3. How Does Receivables Factoring Differ From Bank Financing?
The biggest difference between conventional bank financing and receivables factoring is how both apply their charges. Financing with a bank includes securing capital in advance, based on our aforementioned criteria. The bank then charges your trucking company a yearly interest rate to borrow money. That yearly interest rate is then converted into a daily interest rate by dividing the interest rate amount by 365 days. This daily rate is what is charged against the amount your company borrows. For instance, if your trucking company borrowed $1,000, then your trucking company would pay a daily interest rate for every day it takes your customer to pay their invoice.
This is why it becomes more expensive the longer it takes to collect on the receivable. In essence, you are financing your customer's business for them. It doesn't cost your customer any money when they take 60, 90, or 120 days to pay. In fact, your company becomes an easy source of credit, one that doesn't charge your customer a daily interest rate and one that doesn't charge any penalties for late payment.
Receivables factoring is completely different. Instead of financing your customer's business, you secure the capital based on the value of your existing asset. You no longer have to wait for your customers to pay their bills. Instead, the financing company is responsible for collecting on the receivable. Your company gets its capital upfront and the financing company collects directly from your customer.
Factoring is a popular solution for today's trucking fleets because it allows them to avoid the high costs of waiting for customers to pay their bills. They no longer have to finance their customer's business. They can combine conventional bank financing with receivables factoring and reduce their costs of capital. More importantly, they can pay for their fuel well in advance and avoid the high costs of bank financing.