Why do trucking companies use factoring? There are many business financing options out there that trucking companies can use to get more funding. What sets factoring apart?
Transportation factoring allows trucking and freight bill business owners to expand their businesses, take care of maintenance and insurance, and pay for repairs as needed. Trucking companies often factor invoices because it is easier and faster than paying interest on lines of credit and bank loans. It’s also simpler than juggling multiple financing vendors or collecting those invoices yourself.
Let’s dig into the things you can do when you work with a factoring company.
If your dream is to run a big freight company, you need drivers. However, drivers want to be paid regularly and don’t take kindly to delayed paychecks. You need to afford regular and reliable paychecks to keep your drivers on staff. When you must wait 30, 60, or 90 days for your customers to pay their bills, it makes it hard to keep up.
Drivers talk to each other, and they know who pays on time. They don't keep it a secret. When you can meet payroll like clockwork, you become a reputable employer who can attract and retain the best talent. With more drivers, you increase your productivity and industry reputation.
More than just drivers, you can begin hiring support staff, lease office space, and do everything a big business owner does as the company grows. You can afford incentives to retain qualified drivers and other employees, keeping turnover (which is expensive) low.
Repair or Replace an Engine
Engines are not cheap, and essential truck parts don’t grow on trees. You aren't making money when your truck is not on the road. However, waiting for customers to pay invoices so you can afford repairs and maintenance delays putting your truck safely on the road. It’s a catch-22.
Factoring your invoices puts cash in your pocket now, not later. When you can rely on a steady source of cash, you can repair and replace engines when needed and get your equipment back on the road. When you can perform maintenance on a regular basis, you reduce equipment downtime and probably save yourself some money in the long run.
Make a Down Payment
Do you want to purchase a new truck or lease office or garage space? Invoice factoring does not show up in your books as a debt. When you need to apply for a traditional loan, the bank has no reason to refuse based on your ledger.
Banks often use the excuse of multiple loans and debts to charge high interest rates or deny financing altogether. Factoring invoices removes a source of debt, helping you obtain favorable terms. Some factors also provide traditional loan services. If you need more than factoring, you can continue to work with a trusted partner.
Pay Taxes, Registration Fees, or Insurance Premiums
While your customers have one to three months to pay what they owe you, you are on the hook for bills with specific due dates. If you miss those dates, your finances take a hit. If you take care of expenses using a credit card, you may wind up owing more in interest or penalties.
When you don’t pay taxes on time, the IRS is unhappy. You pay interest, fees, and penalties on your unpaid tax balance and create a headache for yourself. If you don't pay insurance or registration, you are out of compliance, which invites a slew of other problems for your business.
Factor invoices, and you have the cash in hand when bills come due. You won’t owe interest on it, and you can rely on ready cash every time registration, insurance premiums, and taxes arrive in your mailbox.
Grow Your Business
It’s hard to make a business plan with an unstable cash flow. Without a business plan, business growth is unlikely. Let's face it: the average time it takes a customer to pay an invoice is 40 days. Not only that, but almost two-thirds of customers may default on their bill entirely, leaving you in the lurch.
Factoring invoices ensures you receive cash almost immediately. You can use that cash to pay for maintenance, compliance, payroll, and other expenses on time, avoiding penalties. A regular cash flow means you can take advantage of deals as they occur, like discounts on equipment, tires, or buildings.
When you can predict your cash flow, it’s easier to take on more loads because you can keep your equipment in good repair and have money to pay for fuel. Your business becomes reliable, attracting more customers and work.
As your business grows, so does your cash flow. Your financing through factoring is limited only by the amount you invoice. As the money rolls in and you hire and retain talent, you can purchase more equipment and increase your productivity with less risk. Remain an owner-operator if you prefer, or start building a trucking empire with your name on it. Factoring your invoices can help either way.
Factoring Can Help
Now you know why trucking companies use factoring; it’s because they know a good deal when they see one. Traditional bank loans and credit cards add expenses to your ledger, and loans show up as debt on your books, making borrowing more expensive. Waiting for customers to pay invoices creates gaps in your cash flow, and it becomes difficult to keep up with payroll, insurance, fuel, and other bills.
Factoring ensures you deal with creditworthy brokers and other customers while putting cash in your account or on your fuel card within a couple of days (or less) of submitting an invoice. Using a factor can also steer you into better business practices. When you apply for services, one thing factors look at is the size of your customer base. When your customer base is broader than a single broker or shipper, you present less risk.
Factoring supplies services other than money. It ensures you deal with customers that pay their bills and can help you with other forms of financing, offer you discounts, and provide other services your bank won’t.
If a steady cash flow and letting someone else take care of collections sounds appealing, consider factoring your freight bills.