If you run your own trucking business, then you might be painfully aware of the fact that a lot of cash is required on a daily basis to pay fuel bills, drivers’ salaries, routine maintenance and repair bills and your other employees’ salaries. Since most of your clients could be paying you after a period of 30 days, meeting these routine expenses could pose a serious challenge to the growth and survival of your trucking company.
In such a case, you might wish for money in your hand, whenever you need to pay for your routine and even unexpected expenses, such as sudden repair bills or tire replacement bills. You could apply for a bank loan, in order to take care of such expenses. But, if you have just entered the trucking business, then banks would impose restrictions in the form of collateral or guarantors, in order to secure themselves against a bad loan. You might also need to provide your audited financial statements for the previous 3 years showing your profit figures, which would not be possible, if you were new to this line. You would have to repay the loan along with interest in the form of regular monthly installments for a fixed time, failing which the bank could take possession of the collateral offered by you, while availing the loan.
This unique need has created a financial tool known as freight factoring. Freight factoring companies offer you immediate cash against your credit invoices after deducting a factoring fee. They purchase your credit invoice and wire you the invoice amount after deducting a factoring fee of around 1.5% to 5%. This fee will be based upon the business that you generate for your factoring company, the number of days that you have extended to your credit clients and the credit rating in the eyes of your factoring company.
The factoring company might also retain another 5% to 10% of the invoice amount as security, although this would depend on the arrangement that you have with your factoring company. This means that instead of a fixed amount, you can get varied amounts at regular intervals depending on the amount of invoices that you have factored with the company. Thus, as your business grows, you might submit larger invoices to the factoring company, which in turn will provide fatter funds for your business.
Freight factoring will first and foremost help your trucking company by providing instant money without going through the hassles of providing collateral or audited documents. This money will immediately improve your cash flow and enable you to clear your daily bills such as fuel bills, drivers’ and other employees’ salaries, truck servicing and other repair bills, etc. Freight factoring will also enable you to take on new hauls, which previously would have seemed impossible due to shortage of funds. Freight factoring companies can also take over your receivables by collecting your payments from your clients on the due date, albeit at an additional fee. This too will enable you to divert your energy towards increasing sales rather than running after erring clients.