Any business could have cash flow problems, which should not be interpreted as a business failure. Cash flow problems mean that the expenditures for a given period are greater than the revenues. There are times when the expenditures skyrocket unexpectedly like in the case of an unforeseen major maintenance or machinery breakdown. In events like this, the company will be scrounging for funds to meet the unexpected expenses.
Freight carriers are not exempt from this type of problems. A single tractor/trailer combo accident may offset the company’s budget for a given period, necessitating extra funds to cover the expenses.
Freight Factoring
Freight factoring is an easy solution to cash flow problems for a trucking company. Factoring is money advanced based on accounts receivable. The factoring company buys the trucking company’s invoices for freight that had been delivered. The freight factoring company advances to the trucking company a percentage of the invoices submitted. The factoring company will later collect the payment from the customers. Once the factoring company collects from the customers’ invoices, they will release to the trucking company the reserved invoice amount, minus the financing fee for the cash advance.
The amount of fee charged on the cash advance is determined by the quality of the accounts to be collected, not by the strength of the trucking company. The fee fluctuates in accordance with the performance of the receivables and the credit worthiness of the customers.
Benefits of Factoring Freight Invoices
The benefits of factoring freight invoices include the following:
- High initial advance – Most freight factoring companies give trucking companies as much as 95% of the amount value of the invoices.
- Quick approval – Financing lines can be obtained typically in one business day of submitting a completed application package. Freight factoring can be used for cash flow emergencies.
- Improved customer credit quality – Factoring companies typically review the credit worthiness of trucking company’s customers, both existing and new, giving them the chance to choose the best clients.
- Works with fuel cards – Many factoring lines are already integrated with providers of fuel cards for more convenience.
- Allows for growth – Financial flexibility afforded by freight financing allows the trucking company to take more loads that will allow for growth in operations.
Freight factoring is the most convenient cash flow solution that is available to trucking companies in the event of emergencies. Cash can be obtained faster than from traditional bank loans.