One of the challenges for growing transportation carriers is finding shippers that offer quick pays. This is important because quick pays simplify one of the toughest jobs in the transportation company – managing money. Transportation company managers are often faced with a constant tug-of-war between their income and their expenses. Expenses tend to flow quickly because drivers need to be paid, fuel and repairs need to be paid, all placing a constant demand on your cash flow. On the other hand, most shippers prefer to pay their invoices on a net 30 basis. This means that you have to cover all the expenses of delivering a load and then wait up to four weeks to get paid. In the meantime, you have to pay your own expenses by using your cash reserves. If your company’s cash reserves are running low – or if you have none – you will have a problem. A big problem.
Unfortunately, finding shippers that offer a quick pay option can be difficult. Many shippers and customers prefer paying on terms because it preserves their cash flow and is good for their company. This leaves you with the following questions:
- What do you do if you move freight for a quality shipper that will not offer a quick pay?
- Do you turn away the business because you can’t afford it?
- Do you take on the business, and risk cash flow problems?
None of these questions have a good answer. You need an alternative.
The alternative in this case is to finance your invoices using freight bill factoring. Basically, a factoring company provides you with financing for your open freight bills that will be paid on net 30 terms. This gives you immediate working capital that you can use to run your business and minimizes the worries associated with slow paying customers. The transactions conclude once your customer pays on their usual schedule – they are not required to pay sooner. Many freight carriers and brokers use a factoring financing line on an ongoing basis to ensure that they have adequate cash flow.
One challenge that many trucking companies find with conventional business financing (e.g. a line of credit), is that the facility is not flexible. If you max out the line and need additional funding because you got a new customer, the line will not increase automatically. The lending institution will need to go through the underwriting process one more time to determine if you qualify for the increase. It may take several weeks before you learn if you qualified or not. This is where financing freight bills holds an important advantage over other products. The line can often increase as your sales grow, usually automatically or with very little underwriting. Obviously, your shippers credit quality, invoice size, and invoice diversification, need to be acceptable to the factoring company.
Most factoring companies have simple qualification requirements, at least when compared to conventional lending institutions. Since they are financing your invoices, it is very important that your customers have good commercial credit. This makes sense as your invoices are the collateral that is backing the transaction. Your trucking company should be well managed, run by reputable owners, and have invoices that are free of liens. As you can imagine, most transportation companies that have a good roster of customers should be able to meet these requirements. This makes financing your freight bills an ideal option for growing freight carriers that can’t get quick pays and have cash flow problems.