Load factoring, also known as freight bill factoring, is a popular financial strategy employed by trucking businesses — often to manage their cash flow. It involves selling receivables, like bills of lading or invoices, to third-party factoring companies at a discount in exchange for immediate cash.
Contrary to popular belief, though, it’s not only for businesses grappling with cash flow issues. Keep reading to discover how factoring truck loads can benefit your trucking company or owner operator business operations.
And when you’re finished, learn more in our ‘Invoice factoring’ article series:
- What is invoice factoring?
- How are factoring fees calculated?
- Why load factoring is smart for businesses without cash flow issues
- Top invoice factoring companies
What is factoring in trucking?
As mentioned, truck factoring is a type of trucking business financing through which trucking companies sell unpaid freight bills to a freight factoring company for immediate cash. On a high level, here are the steps in the load factoring process:
- A trucking business delivers a load for a customer.
- The freight carrier sends the invoice for the delivered load to the transportation factoring company, called a ‘factor.’
- The factor advances a large percentage of the invoice value (typically 80-95%) to the transport carrier immediately.
- The factor collects the full invoice amount directly from the customer.
- Once the factor has received payment from the customer, they send the remaining balance of the invoice to the freight company, minus a small factoring fee.
At its core, factoring loads is an exercise in cash flow management. After all, irrespective of size or industry, businesses need to maintain steady cash flow to capitalize on growth opportunities.
However, the perception that factoring for trucks is only suitable for companies with cash flow issues isn’t entirely accurate. This misconception might stem from the historical context of transportation factoring as a solution for businesses struggling to keep up with expenses due to delayed payments. Load factoring has evolved, however, to offer benefits to companies with a positive business cash flow too.
Advantages of factoring for trucking companies without cash flow issues
There are many reasons shipping factoring can be a smart choice, even for businesses that aren’t specifically looking for cash flow solutions. Here are a few reasons why:
- Fast access to cash: Even if a business doesn’t have cash flow issues per se, the ability to quickly access cash by factoring trucking invoices can provide strategic advantages. It can enable a business to take advantage of unexpected opportunities, like bulk purchasing discounts, new equipment investments, or operational expansion more quickly.
- Time and resource savings: Bank factors often take over credit collections services, which means the business can save time and resources that would otherwise be spent chasing payments. This empowers businesses to focus more on their core operations and growth rather than administrative tasks.
- Credit risk management: Factors conduct customer credit checks, helping to mitigate the risk of doing business with anyone who may be unreliable. This can be a benefit to businesses regardless of their current cash flow status, as it helps manage and limit potential bad debt.
- Predictable cash flow: Even truckers without cash flow problems can benefit from the predictability that invoice factoring provides. Knowing exactly when they’ll get paid for invoices can help with budgeting and planning, making business operations smoother overall.
- Growth opportunities: The immediate cash from factoring can allow truck drivers to accept more jobs or larger orders, supporting business growth. Rather than waiting for payment on completed jobs, they can move forward with new opportunities.
- Debt avoidance: Factoring isn’t a loan, so it doesn’t create a debt obligation or require any collateral other than the invoices themselves. For carriers that want to avoid adding debt to their balance sheet, factoring can be an attractive option.
Example of factoring loads
Let’s explore a hypothetical scenario where a trucking company, “RoadRunners Inc.,” uses freight factoring services to gain an advantage that isn’t directly related to solving a cash flow issue.
RoadRunners Inc. is a profitable trucking company that maintains steady operations and has a healthy cash flow. The company’s customers are reputable and always pay their invoices on time. However, these payments typically have net-60 terms, meaning RoadRunners Inc. needs to wait two months before they receive payments for jobs.
RoadRunners Inc. spots an opportunity in the market to expand its operations by purchasing a fleet of new, more efficient trucks. The new trucks are eco-friendly, have lower running costs, and can carry larger loads. They’re also equipped with the latest safety features, which would likely lower the company’s insurance costs.
To seize this opportunity, the company needs a large amount of capital. They decide to use a bank with specialized invoice factoring solutions for the transport industry to get immediate access to funds tied up in outstanding invoices.
How the factoring process works
- RoadRunners Inc. completes a job for a customer and issues an invoice for $50,000.
- Instead of sending the invoice to the customer and waiting for payment, they sell and assign the invoice to Bank XYZ.
- Bank XYZ advances 90% of the invoice amount ($45,000) to RoadRunners Inc. immediately.
- Bank XYZ collects payment from the customer.
- After 60 days, the customer pays the full invoice amount of $50,000 to Bank XYZ.
- Bank XYZ sends the remaining 10% ($5,000) to RoadRunners Inc., minus their factoring fee. If we assume the factoring fee is 2.5%, the fee would be $1,250. Therefore, RoadRunners Inc. would receive an additional $3,750.
In this example, RoadRunners Inc. leverages factoring not to alleviate a cash flow problem, but to capitalize on an expansion opportunity quickly. By factoring their invoices, they gain immediate access to capital, enabling them to purchase the new trucks and gain a competitive edge in the market.
Additionally, they reduce future operational costs, positioning themselves for increased profitability in the long run. This underscores how factoring trucking loads can be strategically employed for growth and expansion, not just for cash flow problems and solutions. Compared to potential revenue gains, the cost of factoring freight can be quite small.
Invest in your long term growth with factoring
Selecting a freight factoring company requires due diligence. Aspects to consider include their industry reputation, fee structure, contractual terms, and level of customer service.
The benefits of improved cash flow management, mitigated credit risk, and unlocked growth opportunities make it a viable strategy for businesses aiming for strategic growth. After all, in the business world, having readily available cash equates to having the power to seize opportunities as they arise, leading to long-term success.
FAQ
Yes, freight brokers frequently utilize factoring services to help manage their cash flow. The nature of their role as intermediaries between shippers and carriers often leads to payment gaps, which factoring can bridge by providing immediate funds. This allows brokers to promptly pay carriers, even if shippers have extended payment terms, and helps them manage their operations more effectively.
Whether or not you need a trucking factoring company for trucking largely depends on your business needs. If you frequently experience cash flow gaps due to slow-paying clients, factoring can provide immediate funds, mitigating financial risks and enabling potential for growth.
There’s no one-size-fits-all answer, because it depends on your specific needs and priorities. You should research fees, advance rates, contract terms, and additional services, and choose a company that aligns with your objectives. Here’s a guide to truck factoring companies to help you make your decision.
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