Staffing Oil Field Service
Start Up Staffing Agency
Why Trucking Companies See Receivables Factoring as an Important Financing Tool
One of the biggest issues for trucking companies within this economy has to be the frustration of having to wait 30, 60, 90 or even 120 days before collecting on a receivable. It directly impacts cash flow, raises your company's costs to finance operations, and most importantly, it directly impacts your company's ability to generate healthy gross profit margins. After all, the longer it takes your trucking company to collect on a receivable, the more costly it becomes. Your company could have the most cost-effective routes and yet still lose profit simply because of the amount of time it takes to collect on receivables. This is why a number of trucking and fleet management enterprises use receivables factoring in order to secure the capital needed to manage their business. It's a proven asset-based financing solution and one that will simplify how your company manages its capital reserves.
Understanding Your Financing Options
Why is factoring so popular amongst today's trucking companies? Answering this question involves reviewing some of the alternatives freight management companies have with respect to financing their operations. So what other options are there? For instance, could you insist on prepayment from all customers? Unfortunately, prepayment and freight management don't typically go hand-in-hand. Customers want to make sure they receive their products without damage and that means they need to inspect the shipment upon arrival. No customer will ever prepay if another trucking company is offering terms, and no customer will prepay unless they are confident in the quality of the service being provided.
Bank and business credit line financing is problematic at best. This is especially the case for those trucking companies that are less than creditworthy. In addition, banks advance capital based on a company's ability to show consistent performance. They review the company's three financial statements; income statements, balance statements and cash flow statements must be provided in order for the bank to perform a risk assessment. The problem is immediately obvious: How can a freight company secure financing from a bank if their cash flow is always a problem and their cash position is always negative? Simply put, the bank won't advance capital under these circumstances, and it has nothing to do with how the trucking company manages its business or how profitable it is. Instead, it's merely the reality of operating a business in this economy, one where banks are less willing to work with trucking companies who don't pass their stringent criteria.
Factoring is a Viable Alternative Financing Solution
Receivables factoring is one of many asset-based financing solutions that allow companies to use existing assets in order to improve their cash flow. For instance, a company can use inventory financing in order to borrow against the value of the products held within its warehouse. A company can also use purchase order financing, which involves using the value of current purchase orders and customer backlogs in order to finance operations. However, while each of these options are interesting, they just aren't suited to the urgent needs of trucking companies. In essence, a trucking company provides a service and it is the service that lends itself well to receivables factoring. So what makes receivables factoring so interesting to today's trucking and freight management companies?
• How Does Receivables Factoring Work in the Trucking Industry?
With freight factoring, your trucking company will sell its receivable to the finance company in exchange for immediate working capital. The financing company will advance your enterprise cash based on a portion of your receivable's value. The advance is based on the value of your receivable, its age and most importantly, the credit worthiness of the account debtor. In this case, the account debtor is the customer who owes on the receivable. You can use the cash to finance your operations, prepay vendors and other creditors, or cover your fuel and repair costs within your trucking fleet. Once your customer pays their invoice, your company is reimbursed the difference between what you originally received as a capital advance and your customer's final payment.
• How Does the Factoring Process Work For Trucking Companies?
One of the immediate benefits of factoring is that your company isn't forced to wait on financing in order to run its operations. The process is simple. First, you provide the financing company with a list of the customers you would like to use factoring with. The financing company will then review their credit ratings and history. Second, a credit limit is established based on the account debtors' (your customers') credit ratings. New customers are added going forward. Third, you go about servicing your customer base and making deliveries. Fourth, you provide both the bill of lading, and your customer's invoice, to the financing company. In a number of instances, this information can be faxed, scanned or emailed. However, some financing companies require you to send the invoices by courier. Fifth, the factoring company confirms the shipment was received. Upon confirmation, the capital is advanced to your company within a 24 hour period.
Reading all five of the steps above might give the impression that it takes a while to secure the working capital your trucking company needs. However, this simply isn't the case. All of this is easily managed and can be completed within minutes. In fact, the entire process operates in real-time. Your trucking company can view its credit line 24/7, thereby allowing you to review incoming and outgoing credits within your account. In addition, you can review the administration fees and effective rates charged against individual receivables.
1. Identify Factoring Customers: Provide a list of companies you want to use factoring with.
2. Credit Line Established: The credit rating for these customers will be used to establish a working credit line for your trucking company.
3. Provide Services to Customers: Your company goes about making deliveries to its customers.
4. Provide Bill of Lading and Invoice: You provide the bill of lading and invoice from each delivery directly to the financing company.
5. Capital is Transferred Once Deliveries are Confirmed: The finance company confirms delivery and the funds are transferred to your account within 24 hours.
One of the more important reasons why trucking companies prefer receivables factoring is because it allows them to decide which customers to use factoring with. As such, they can choose which customers to keep in-house and which customers to give to the financing company. This flexibility allows them to combine conventional financing with receivables financing. In addition, receivable factoring enterprises don't base their decision to advance your company capital on your company's credit rating. They base their decision on the credit worthiness and history of the account debtor.
Today's trucking companies use factoring because it is easy-to-use and doesn't involve a painful and drawn-out review of the company's credit history. Instead, the decision to advance your company money is based on the credit worthiness of the customers you decide to use factoring with. Ultimately, this puts the power of financing in your hands and allows you to decide whether to retain certain customers in-house, or send them to the finance company to have their receivables factored.