Reports published by the American Trucking Association estimate that there are at least half a million trucking companies in America. Now, here´s the interesting part of it – more than 80 percent of these companies have less than 20 trucks! Trucking companies are essential to the economic growth of a country. They ensure that essential goods and supplies are easily accessible all over the country.
If you’ve worked in the trucking business before, you are well aware of the concerning disparity between the completion of the work versus the duration it takes for the client to process the payment. So, why is this disparity a concern really? Well, the disparity is a major issue because it causes cash flow problems, leading the business to encounter a range of financial challenges.
Of course, it’s the norm to extend the payment period to a month, two months, or 3 months to regular and volume customers; the extended periods are provided in good faith to ensure that the customers continue working with a company that is flexible with the payments. However, the extended period can cause major problems for the business. After all, there will still be operating costs and a business will still have bills to pay. And, these bills that we are talking about usually don´t have extended payment options.
So, is this fair? Of course, isn´t fair for the people involved in the transportation business but in life, you have to play with the cards you´re dealt with. Fortunately, there are several methods trucking companies can adopt to get access to money and ensure that the cash flow remains constant. One of the easiest ways trucking companies can improve their cash flow is through an accounting practice known as ¨invoice factoring for trucking companies.¨
What is invoice factoring exactly?
Contrary to popular opinion, invoice factoring is not a loan. A business organization would have to meet various different criteria in order to qualify for an unsecured loan. For instance, the business would have to provide evidence of collateral and must boast of a good credit history. And, let´s be honest here—it’s extremely difficult to obtain a bank loan. Acquiring micro-loans are next to impossible for small and medium sized businesses. Hence, many businesses resort to using the viable and convenient solution that is, invoice factoring.
Invoice factoring is simply a way of getting money from the value of the invoices that are scheduled to be processed in the near future. It requires your business to pay a small convenience fee to the factoring agency that is willing to advance money to your business on the basis of your customer accounts receivable invoices. This method is excellent for businesses that regularly face imbalance in sales and cash flow as it allows businesses to receive liquid cash to pay off immediate bills.
In a nutshell, the accounting practice of ¨invoice factoring¨ allows you to receive money immediately from your customer. However, it involves you selling your uncollected invoices for a discounted rate. The agency that purchases your invoices provides you with a percentage of the face value upfront. So, what do the factoring agencies do? Well, the factoring agencies then takes on the responsibility of collecting the lump sum amount from your customer. After getting the full amount, the factoring agency then pays you the rest of the contracted amount.
How does invoice trucking factoring for trucking companies work exactly?
The transportation business takes serious hits from slow paying account receivables; that´s because the fees and services are often paid by numerous contractors depending on the duration of shipping for the product. Hence, there is someone else that needs to be paid first before you receive your payments. You might have already earned that money, but it will take time before you actually receive it.
It´s best for us to elucidate how invoice trucking factoring works for trucking companies through a story. Let´s say that Truck Company A transports many loads all over the country. However, after dropping off the goods, the company has to wait for a month or so to receive payments. Now, during this time, the company cannot suddenly hold off its operations and not transport more loads. However, in order for the company to go about its business, it will require liquid cash to pay its employees. It will need money to put gas in the trucks! The company will need to tend to their operating costs.
Now, that´s where invoice factoring for trucking companies comes into play. The process allows Truck Company A to receive cash immediately, allowing the business to operate smoothly, completely eliminating the need to wait for a month or so to receive payments. The factoring agency can provide the truck company with the cash flow it requires within 24 to 48 hours of contact. The cash flow can then be used to expand the business, hire more drivers, and maintain the business.
The consistent cash flow allows the trucking companies to focus on moving more loads. By reducing stress, the immediate cash flow allows them to focus on tasks that are more profitable.