When you run a trucking business that has weekly and daily bills such as salaries and fuel, but shippers pay at 30, 60 or even 90 days, ensuring you have the proper cash flow to maintain operations can be tricky. Especially if you are also on the road driving each day. You may feel as though you are constantly borrowing money to keep your truck fueled and running.
None of this would be a problem if all shippers paid their invoices immediately, but that is an ideal world that isn’t part of your operation. The solution is tracking down those invoices and getting shippers to pay quicker, either through incentives such as discounts or other means. This is time-consuming, though, and may keep you off the road as you work the phones.
That’s why many owner-operators and smaller fleets have turned to invoice factoring. For those unaware, invoice factoring, sometimes called freight factoring, is the process of selling your accounts receivable for quicker payment.
It works very simply: a carrier contracts with a shipper to move a load as usual, and then contacts a factoring company who will review the contract and determine whether it is eligible for factoring. If it is, upon delivery of the load, the carrier submits the invoice to the factor and the factor would pay the carrier the amount of the invoice, minus a service fee. The service fee can vary based on several factors.
Factoring is not limited to owner-operators or small fleets, but can be beneficial to fleets of any size, and is a great way to manage cash flow. The advantages of factoring to a carrier include quicker payment – often the same day but usually within 24 hours. It also eliminates time spent tracking down the shipper for payment, or interest paid on credit card transactions or loans that are used to keep trucks fueled or employees paid while you wait for payment. In the end, the service fee can oftentimes be a smaller cost to the carrier than charges related to acquiring capital to fund the business on a daily basis while waiting for a shipper to pay.
While invoice factoring can be an easy outlet to getting paid quicker and keeping your cash flow humming along, finding the right factoring company is not as easy. There are plenty of options, and several questions you should ask before committing to a factor.
Keep in mind that a factoring company can be a business partner – some provide factoring services, but some also offer other services, such as fuel card advances, insurance services and even equipment financing. Having a relationship with a full-service company can provide additional benefits down the road.
As you start the process of locating a factor, start by asking yourself these three questions:
1. Can I trust them?
2. Do they care about me, my operation and my family or am I just a business transaction?
3. Are they committed to excellence?
“Before even using a factor, it’s critical to the success of your business to choose the right factor,” explains Jason Mullican, vice president of channel marketing for Triumph Business Capital.
Trust is perhaps the most important question that must be answered positively.
“There has to be a level of trust within any healthy, successful relationship,” says Mullican. “There has to be transparency and honesty. Sometimes people will just tell you what you want to hear; this can be a dangerous thing when you’re trying to pick the right factor.”
Mullican advises finding a factor that is honest with you, even when you may not agree. Also make sure that the factor has clearly explained – to your satisfaction – all the contractual requirements of the agreement, including policies and processes.
The second question, do they care about me, my operation and my family or am I just a business transaction? is also an important consideration.
“Listen, every company has to make money,” notes Mullican, “otherwise, they cease to exist and can’t help anyone. But, if they’re committed to the success of your business, they’ll take the approach that if you don’t succeed they won’t succeed either. Choose a factor that is knowledgeable and passionate about your industry and theirs. In return, they’ll be passionate about your business.”
The third question, are they committed to excellence, is growing in importance in trucking. With the high degree of technological change happening in the industry, a carrier needs a business partner that is willing to innovate.
“Industries change, therefore, business models should be constantly reevaluated and tweaked to better serve the customer,” advises Mullican. “In today’s world, you need a business partner that exercises a high degree of flexibility and is able and willing to adapt with the times. Look for a factor that’s a pioneer in their space. This will serve you well for the long haul.”
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