Most transportation companies – carriers and brokers alike – will need financing at one time or another to be able to grow past the investment of the original owners. In part, this stems from the fact that the industry is very competitive and margins can be thin making it difficult to build cash reserves. Also, most shippers pay their freight bills in 30 to 60 days, which combined with minimal cash reserves can create cash flow problems.
Slow revenues and thin margins can create a dangerous combination that leaves transportation companies vulnerable to unpredictable events – such as a slow customer payment, a major equipment breakdown, quick payment demands from drivers or fuel increases. Well capitalized companies can handle these events simply by tapping into their cash reserves. But growing companies, or companies with minimal reserves, run the risk of running into serious problems.
You can certainly minimize these cash flow problems by optimizing how you manage your accounts receivable. For example, you should run credit reports to make sure you only work with shippers that will pay for their loads on a timely basis. Additionally, you should always make sure that all the proper paperwork (e.g. freight bill, bill of lading, etc) is in order. Lastly, you should consider offering discounts in exchange for quick payments. But this strategies do have their limitations.
Although optimizing your invoicing processes will definitely help, most transportation companies will ultimately need business financing to be able to grow and succeed. Usually, company owners will approach their local institution to try and get a business loan. However, getting a business loan in the transportation industry is very difficult for carriers and nearly impossible for brokers. Furthermore, institutions will usually require that the company present three years of pristine financial records. Also, they will only work with companies that have substantial collateral and whose owners have a solid net worth. Ultimately, few transportation companies will be able to meet this criteria.
However, there is a new alternative way to finance transportation companies that has been gaining traction in recent years. It’s called freight bill factoring. Factoring accelerates the cash that is due to your company from slow paying freight bills. It provides the quick liquidity you need to pay for company expenses – such as drivers, fuel and repairs – without having to worry about the timing of your shippers payments.
Freight bill factoring transactions are usually structured as two advances against your freight bill. The first advance usually averages 90% and is paid as soon as the load is delivered and invoiced for. The second advance, which is the remaining 10% less the fee, is paid once the shipper pays the invoice in full. The factoring fee varies and is calculated based on the credit quality of your shippers, the size of your advances and the volume of invoices that you factor.
Perhaps one of the most important advantages of using freight factoring to finance your transportation company is that it’s easier to get than most conventional forms of business financing. Since factoring companies are funding your invoices – they view them as your most important collateral. To qualify, it’s very important that your shippers, who pay your invoices, have very good commercial credit ratings. Also, your invoices must be free of any encumbrances created by tax or legal problems.
Freight bill factoring is also very flexible. Most conventional business financing solutions , like lines of credit or business loans, have fixed ceilings. Factoring lines tend to have ceilings that are directly tied to your sales. This means that the line can grow along with your company, provided that you are selling to shippers that have solid commercial credit ratings. This makes freight factoring an ideal solution for small and medium sized transportation companies that have substantial growth opportunities but don’t have the cash flow to execute on their growth plans.