Trucking companies are one of the most cash hungry businesses in the transportation industry. There are driver expenses, equipment expenses and fuel expenses. However, trucking companies can also be very profitable, if cash flow is managed properly.
One of the main challenges that trucking company owners face is that freight bills t https://npfinancials.com.au/can take as long as 60 days to get paid. This puts them in a tough spot, because unless the company has a significant amount of cash in the bank, it usually cannot afford to wait to get paid.
Usually, the owner will try to go to the bank to obtain financing hoping that a loan or line of credit might solve the problem. Unfortunately, banks will seldom finance businesses that have less than three years of audited financials that show consistent profits. Of course, if the trucking company could provide three years of financials that show profits, it would not need financing.
A better solution is to use freight factoring. Freight bill factoring enables you to convert your slow paying freight bills into cash by selling them to a factoring company. This provides you with immediate financing and allows you to cover all your ongoing business expenses. Also, as opposed to bank lines of finance, freight bill factoring automatically grows as your sales grow, providing you with flexible financing.
The process is simple. The factoring company buys your invoices and pays for them up front. The transaction is typically done in two installments. The first installment is called the advance and the invoice factoring company provides you with up to 90% of the invoiced amount. The remaining 10% is held as a reserve to cover disputes or charge backs. The remaining 10% (less a fee) is rebated as a second installment, once the invoice is actually paid.
The factoring fee is based on how long the invoice is factored for and the monthly volume of factored invoices. Discount rates average between 1.8% and 4% per month based on these parameters.
Most factoring companies buy invoices using non-recourse factoring. Under a non-recourse agreement, the factoring company bears the risk of non-payment if your client becomes insolvent or goes out of business. This is a nice benefit of factoring and increases the peace of mind of business owners.