As the trucking industry continues to grow, business owners are constantly seeking efficient methods to fund their operations. Traditional funding sources like bank loans can be time-consuming and entail stringent approval processes.
This article explores the four best alternative business funding options for trucking companies. Keep reading to find out how they can make it easier for you to expand and manage your fleet.
Quicklook: Best alternative funding sources
- Invoice factoring
- Equipment refinancing
- Business lines of credit
- Fuel advances
4 best alternative funding options for trucking businesses
Invoice factoring
What is invoice factoring?
Invoice factoring is a financing solution where a business sells its outstanding invoices to a factoring company for immediate cash. The factoring company, called a “factor,” then works to collect the invoice amount from the client and charges a fee for their service.
Pros
- Improved cash flow: Invoice factoring provides immediate access to cash, allowing trucking companies to meet operational expenses and maintain a healthy cash flow.
- Faster funding: Compared to traditional loans, invoice factoring offers fast qualification, and a quicker funding process, enabling businesses to address urgent financial needs.
- No collateral required: Invoice factoring does not require collateral, making it a more accessible financing option for small and medium-sized businesses.
- Easier approval: Invoice factoring approvals are generally based not on your business’ credit history, but on your customers’ creditworthiness, making it easier to qualify compared to traditional loans.
Cons
- Factoring fees: Factors charge fees for their services, which can eat into your profit margins.
- Limited control over collections: The factor handles invoice collection, which means you have less control over the customer relationship.
- Dependence on customer creditworthiness: The amount of funding you can access through invoice factoring depends on the creditworthiness of your clients. This can be limiting if you work with clients that have lower credit scores.
Equipment refinancing
What is equipment refinancing?
Equipment refinancing is a type of asset-based lending where a trucking company’s working equipment serves as collateral for the loan. It is a financial tool used to convert equipment, such as trucks and trailers, into cash in hand.
Pros
- Access more cash: Equipment refinancing allows businesses to obtain a significant injection of working capital or to restructure debt. Refinancing can be used to fund growth, meet immediate financial obligations, support a turnaround strategy, or consolidate multiple loans, making it more efficient to manage debt and improve financial stability.
- Maintain credit lines: By using equipment refinancing, businesses can preserve existing credit lines for other purposes.
- Maximum evaluations: Leading transportation financing specialists provide high valuations on equipment with up to 75% Net Orderly Liquidation Value (NOLV).
- Flexible terms: Alternative lender’s equipment refinancing offers fewer loan restrictions than with bank loans. There are no reporting requirements, and few loan covenants.
Cons
- Equipment as collateral: The financed equipment serves as collateral, which means if the loan is not repaid, the lender can take it.
- Cost of ownership: Equipment refinancing increases the cost of owning the equipment.
- Potentially higher interest rates: Depending on your credit profile, equipment refinancing interest rates may be higher than traditional loans.
Business lines of credit
What is a business line of credit?
A business line of credit is a flexible financing solution that provides trucking companies with access to funds up to a predetermined limit. Similar to a credit card, interest is only charged on the amount borrowed. The business owner can draw funds as needed and repay the amount borrowed at any time.
Pros
- Flexibility: Business lines of credit offer flexibility in accessing funds, making it a suitable option for businesses with fluctuating cash flow needs. The borrower can typically draw down on the account at any time, up to a maximum limit which cannot be exceeded.
- Cost-effective: Interest is only charged on the amount borrowed, making lines of credit a cost-effective financing solution.
- Multipurpose: A business line of credit can be used for various purposes, including covering payroll, purchasing equipment or funding expansion.
- Quick access to funds: Once approved, businesses can access funds quickly, allowing them to respond rapidly to financial needs.
Cons
- Variable interest rates: Business lines of credit often have variable interest rates, which means costs can increase over time, affecting overall financing costs.
- Limited funding: The funding available through a business line of credit may be limited compared to other financing options. An alternate funding option is needed for large scale projects or investments.
- Potential for misuse: The flexibility and ease of access to funds through a business line of credit can lead to misuse or over-borrowing. This could negatively impact your company’s financial health.
Fuel advances
What are fuel advances?
Fuel advances are a specialized funding option tailored for the trucking industry. A factor provides an advance on a trucking company’s upcoming load, which can be used to cover fuel expenses. Once the load is delivered, the factoring company collects the full invoice amount and deducts the advance, along with a fee.
Pros
- Immediate access to funds: Fuel advances provide immediate access to cash for fuel expenses, helping companies maintain a steady cash flow.
- Manage fuel price fluctuations: Fuel advances can help trucking companies manage fluctuations in fuel prices, ensuring they have the funds needed to cover fuel expenses.
- Streamlined process: Since fuel advances are specific to trucking, the funding process is often more streamlined and efficient compared to other options.
Cons
- Fees: Fuel advance providers charge fees for their services, which can reduce your overall profit margins.
- Reliance on factoring companies: Like invoice factoring, fuel advances depend on factors, which means your funding is tied to their terms and conditions.
- Limited to fuel expenses: Fuel advances are specifically designed to cover fuel expenses, limiting their use for other business purposes.
Alternative business funding may be right for you
Invoice factoring, equipment refinancing, business lines of credit and fuel advances are each excellent alternative funding options for trucking companies.
It’s crucial for business owners to assess their specific financial needs, risks, and the impact of each funding method on their company’s overall financial health. By carefully evaluating these factors, trucking businesses can select the most suitable funding option to support growth and success.
FAQ
Invoice factoring is not a loan. Instead, it entails selling your outstanding invoices to a factoring company in exchange for immediate cash. This allows trucking businesses to access funds quickly without incurring debt. In contrast, a bank loan requires a longer approval process and adds to a company’s liabilities.
Yes, many alternative funding options, such as invoice factoring and fuel advances, are available to new trucking companies. These funding options can provide much-needed capital for startups to grow and establish themselves in the industry.
As with any financial decision, there are potential risks involved with alternative funding options. It is essential for trucking business owners to carefully evaluate each option and consider the associated fees and interest rates. Working with reputable funding providers can help mitigate these risks and ensure a positive experience.
