If you own a trucking company that depends on clients paying their invoices on time for you to have the necessary amount of fluid cash to run your business smoothly, you are probably highly familiar with the serious issues that can be caused by major clients not paying their invoices on time.
After all, there is a fine line between being a professional company that expects to get your invoices on time, and badgering your clients to the point that they look elsewhere for their trucking and freighting needs.
How Truck Factoring Works and Why Many Companies Depend on It
For that reason, it is quite possible that you will have to look for alternative ways to get the money you need while your clients take their sweet time to get those invoices paid and completed.
One of the most popular forms of financing that trucking companies turn to on a daily basis is known as truck factoring, invoice factoring for freight bill factoring.
This process comes with many names and monikers, but they all stand for effectively the same thing.
So, whether you are new to the idea of getting the financing you need through a truck factoring company or are simply looking to learn more about the fast and easy process that can lead to financing between thousands and millions of dollars, then you have come to the right place.
Let’s get started!
Dealing with client invoices
As a business, there is no doubt that you have specific terms and services when it comes to the trucking services that you offer your clients. Beyond that, it is highly common that trucking companies operate on credit.
That means that you take care of the job that your client has paid you to do without actually getting that cash upfront.
Typically, companies will have between 30 and 60 days to have the invoice that you send over to actually get paid and completed. In fact, the larger the companies that you work with, the more likely it is that they will actually expect you to operate on credit.
The prime reason why is because it is a great deal for them as they get to take advantage of your great services for a month or two without having to actually fork the cash over.
While this is obviously an attractive deal for your clients, it can be quite tough for companies to operate for a month or two with very little liquid cash coming in.
You need the money sooner than that so that you can pay your bills, pay your employees, fill out your stock, maintain a general upkeep of your offices and fleet and so much more.
While some companies end up offering discounted rates in exchange for expedited payment, this strategy is not all that reliable and also forces business owners such as yourself to leave a fair amount of money on the table!
That’s where truck factoring comes in as a heavily useful tool for companies – such as yours – that need liquid cash in order to operate smoothly but do not want to leave large percentages of money on the table just to convince their clients to actually pay their invoices on time.
Truck factoring as a solution
So what is truck factoring?
In short, it is a highly popular way for companies to get the money they need through the invoices that they are owed.
It also keeps you from having to have those tough conversations with your clients, which can lead to you ultimately losing some valuable business.
This solution finances your accounts receivables and provides you and your business with almost immediate cash that you can use to pay your employees, suppliers, and more.
On top of that, truck factoring allows businesses like yours to reduce your bad debt as your truck factoring company will make it easier for you to weed out the potential customers with bad credit from the customers that have great credit and are much more dependable in terms of when they will pay you.
So, now that we have pinned up truck factoring as the solution to all of your financial issues, you are probably wondering what exactly truck factoring is, right?
How does it work?
Truck factoring is structured as the purchase of the accounts receivable.
Overall, the vast majority of these transactions are known to be funded in two separate installments. The first installment comes as an advance and the second installment comes as a rebate once the invoices are paid.
Typically, these transactions are going to operate in the following structure:
- First, you deliver your products/services to your client(s)
- Then, you send an invoice to the client
- Next, factor advances between 75 percent and 95 percent of the receivable
- Then, your client will pay the invoice after 30 to 60 days
- Finally, factor rebates the remaining percentage subtracted by a fee
The advance rate that your business receives is going to be based on the level of risk that your industry holds. However, typically businesses can expect an advance of somewhere between 80 percent and 95 percent.
Because trucking is considered to be a fairly low-risk industry, advances are often known to be worth as much as 95 percent of the total amount of funds owed.
Consider the difference of what money you will be letting go of if you use truck factoring as a financing option compared to reducing your costs to your clients in order to expedite payment.
There is quite a large chance that you will be giving up far more than just 5 percent of your prices in order to get that fast payment. For that reason already, it should be abundantly clear to you just how valuable truck factoring can really be.
What costs to expect
By now, you are probably wondering how much this process is going to cost you and your business in the event that you do decide to take advantage of truck factoring in order to get a major influx of cash.
In the end, the rate that you are offered from a given factoring company is going to be decided based on the creditworthiness of your invoices as well as your transaction risk.
Typically, the rate will end up somewhere between 1.15 percent on the low end and 4.5 percent on the high end. This equates out to 30-day pay cycles. Rates can be prorated as well based on your business’ needs.
Will my company qualify?
One of the most prevalent benefits of getting the funding that you need through truck factoring is that you will not need to depend on the credit score or financial history of your own business to gain approval.
That is, of course, absolutely not the case when it comes to something like applying for a small business loan.
In fact, applying for truck factoring is considered to be much easier than applying for a small business loan to get the cash that you need.
The reason why is because instead of the financing being based on the credit and financial history of your business, it is going to be based on the creditworthiness of your clients and the invoices that they own.
Due to the fact that it is important for your business to only work with clients that already have strong credit scores, you can be sure that the vast majority – if not all – of your clients and invoices are going to have strong enough credit to be valuable to you in your transaction.
Beyond that, there are a few things that you are going to want to be sure your business has in order to improve your chances of being accepted:
- Your business should have unencumbered A/R, meaning your business is liens free
- Your business should be free of legal or tax problems
- Your business should have years of experience within your industry
Top benefits of truck factoring
If you are wondering what the top benefits of truck factoring are, then look no further. Let’s break them down now.
One of the top benefits of truck factoring is that the deals can be quite flexible from a time standpoint.
What that means is that truck factoring companies are going to be quite flexible with the time frame of your agreement based on what you need.
If you need a short-term cash influx, you can make an agreement for a few months. If you are looking for a more long-term situation, you can utilize truck factoring for years.
Another top benefit of truck factoring is that you will never have to give up the equity of your company to get financing. The reason why is because the invoices themselves are the collateral in the loan, not the value that your company holds.
The final benefit of truck factoring is that the amount of your financing is directly related to the amount of money you are owed through your invoices.
Some companies will agree to finance worth several thousand dollars, some will get several million dollars.
The amount you can get directly depends on how much money you are owed so the amount you get can grow larger and larger as your company does!
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