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The auto transport business can be lucrative but companies often face cash flow issues due to slow and late bill paying. Factoring firms help the auto transport industry maintain cash flow by providing money in exchange for a company's receivables.
Cash flow, of course, is the money required to keep a business running from day to day. Auto transport companies need cash to pay employee salaries, to maintain and repair equipment, to pay creditors, and to pay other business expenses.
After the “Great Recession,” the availability of traditional forms of financing like bank loans has declined significantly. Although the economy is recovering slowly, the lending markets are still in bad shape. Businesses have an extremely difficult time qualifying for loans and lines of credit. In many cases, traditional bank loans require a loan guarantee from the government or a wealthy investor.
Another problem is that traditional financing takes time for approval. In many cases, it can take up to 30 days or more before the auto transport sees any money. That is often too late for them to pay their bills on time.
In order to address this problem, auto transport companies turn to factoring companies that provide money for accounts receivable. In most cases, the cash provided is not in the form of a loan. Instead, the factoring company buys most of the receivables and then takes over most or all of the collection duties.
Auto transport companies and cash flow
In the auto transport industry, clients tend to pay after the company completes the job. In many cases, customers may take up to 60 days or more after the job before they pay their bills in full.
The nature of the industry, and also the bad shape of the economy, often translate into clients paying their bills late. However, in the mean time, the auto transport company still has their own bills to pay. For each freight-hauling job, then, the company must pay all expenses upfront and wait for the client to pay later.
Not surprisingly, many companies find that they are short of cash and need external financing sources.
How factoring works
The typical types of factoring offered are:
• Invoice and account receivable factoring – With this type of factoring, the financing company buys the invoice or receivables. The client does not incur debt for the cash provided.
• Accounts receivable financing – A debt-based option in which the factoring company provides a loan or line of credit with receivables used as security.
The first option is more popular since it means that the client keeps free of any debt obligation. The factoring company actually becomes a co-owner of the client's receivables.
A Freight Factoring Company will typically provide cash for a certain percentage of the receivables. For example, they may provide cash for up to 80 to 95 percent of the total receivables.
At that point, the factoring company will usually take over collection duties for the account. Once the auto transport company's customers pay the receivables, the factoring firm returns the balance of the receivables to the client minus a fee.
The benefits of factoring include:
• Fast approval – Unlike traditional types of financing, factoring does not require a lengthy approval process. Bank loans involve credit checks and other types of customer analysis. With accounts receivable financing, approval often occurs within the same day.
• Easy approval – Approval usually depends on the creditworthiness of the auto transport company's customers. So long as the company has good customers, there usually is no problem.
• Ongoing credit analysis – The factoring company continuously analyzes the auto transport company's customers for creditworthiness. As such, they provide an extra service for their client.
• Collection management – The factoring company takes up all or part of the collection duties. Again, this frees the client to direct more of its resources to the core functions of the business.
• No debt added to books – Most factoring does not involve the client taking on debt. Therefore, the company's financial outlook does not take a hit as compared to acquiring liabilities like bank loans and other forms of credit.
Some factoring companies require that their clients sign contracts with them that typically last from six months to one year. During this contract term, the client must factor with the firm for the whole period.
Qualifying for accounts receivable financing
Receivables financing is easier to qualify for than traditional financing in today's economic environment. The most important factor is the creditworthiness of the auto transport company's customers.
For example, receivables from government customers or large established companies are good. On the other hand, if the customers have a history of payment problems, there could be trouble in getting financing.
The creditworthiness of the auto transport company usually only comes into question in cases that involve receivable loans or lines of credit. Factoring companies, though, usually use collateral to reduce their risk when providing debt-based financing.
For factoring lines of credit, the company generally must have been profitable for a certain period and must have low leverage, i.e., the total debt must be considerably lower than total equity.
Some factoring companies will only work with companies of a specific minimum size. If the auto transport company has tax problems that could also influence whether they will receive financing approval.
Since the government has priority when it comes to collecting late taxes and tax penalties, factoring firms may not risk buying receivables from an auto transport company suffering from major tax problems. However, minor tax issues are not usually an impediment to receivables financing.
Where to find factoring companies
Many firms offer factoring as an alternative to traditional financing sources. These companies are typically smaller than the financial institutions that provide traditional business loans.
For this reason, it pays to research these firms and to compare quotes from different providers. Rates and charges can vary widely from one company to another. The rate, again, is the percentage of receivables that the factoring company will advance as cash to the customer. The charge or fee is the amount charged by the factoring company after bill collection.
Some companies require long-term contracts while others have no such obligations. Some companies will also have minimum fee charges.
One way to compare companies is to use the major web search engines and comparison websites. The comparison sites allow users to compare quotes from different companies in one easy-to-read list.
Web comparison sites may also provide reviews and ratings of different factoring providers. These sites can be useful in getting an idea of the quality of service provided by each firm.
Auto transport companies often suffer from cash flow problems. Because their customers pay bills slowly often taking up to 60 days to pay after a completed job, these companies often run out of capital.
Traditional financing is more difficult to obtain, so auto transport companies must turn to alternative sources like factoring companies. Factoring companies provide quick cash by purchasing the auto transport company's receivables. Alternatively, factoring firms can provide loans or lines of credit secured by the auto transport company's receivables.
In most instances, these financing options can provide cash within a 24-hour period. In comparison, traditional financing companies may take up to 30 days or more before approval.
Because rates, terms and qualifications can vary widely, auto transport companies will benefit by shopping around for and comparing quotes from a large number of factoring providers.