If you own and/or operate a trucking company in any capacity, you likely already know all of the major costs that come along with the territory, so to speak. First of all, there’s fuel, there’s truck cost, insurance, food/beverage/provisions, not to mention professional services. There are also additional expenses that you might not have planned for.
No matter how prompt you are at paying your bills, it’s likely that you have a client or two who lags when it comes time to pay their invoices. As a business owner/operator, it’s not likely the best practice to strongarm your clients, even if they owe you a significant amount in unpaid invoices. It’s always best to come from a place of understanding, especially while operating in uncertain times.
Having unpaid invoices is not an uncommon problem for trucking companies. As a matter of fact, Entrepreneur reported that the total unpaid invoice amount across the entire U.S. (and this was just counting small businesses) is somewhere around $825 billion — a number which is equivalent to around 5% of total U.S. GDP. The same source reported that the average small business has around $84,000 in debt when it comes to unpaid invoices. In such cases a quality factoring company might come into play.
What is Invoice Factoring?
Invoice factoring is a process that occurs when a trucking company decides it cannot wait for liquid assets to come to them in the form of invoice payment for products/services rendered. Instead, a trucking company will seek out an invoice factoring service. With an experienced factoring company, a trucking company is able to inject cash directly into their respective accounts. How? By selling valid and unpaid invoices to the third party factoring company at a slight discount.
Did you know that your trucking company can get immediate cash for any unpaid invoices due within 90 days of receipt? Invoice factoring helps give businesses an additional option instead of being forced to wait for customers to finally meet financial obligations that were previously agreed upon. If an invoice is paid late, this could end up influencing a company’s ability to pay its own bills, which can result in extensive late fees that stack up, not to mention stress and strains when it comes to your working relationships.
Companies might choose invoice factoring if they need cash to make a large purchase (for instance, when it comes to a space/building, equipment/machinery, upgrades/renovations, new technology implementation, and more). When a trucking company makes a business purchase, chances are, the merchant is not going to be interested in waiting for your pending invoices to be paid before they receive their payment. In such cases either a business loan or invoice factoring services become necessary.
Business Loans for Trucking Companies
Many trucking companies take advantage of SBA 7(a) loans for trucking and transport companies, which can come in handy for working capital funding, commercial real estate ventures, as well as equipment purchases. The average loan amount, according to SBA7a.loans, is $106,000.
When a trucking company needs working capital, it’s usually because a big expense has hit the business, which can come as the result of an injury or accident, equipment damage/malfunction, or even smaller matters like paying overtime wages. Only when a person runs a business do they become aware of all the hidden expenses and liabilities that come with the territory.
The trucking industry happens to be extremely competitive, so a trucking company might at some point be met with the prospect of acquiring a competitor, which can often entail taking on another trucking company’s routes, clients, trucks, and even drivers. An instance like this would also likely call for a business loan in lieu of invoice factoring.
Trucking companies might also look into refinancing current business loans in order to take advantage of lower interest rates, which will help free up capital for day-to-day operations.
When it comes to non-emergency SBA 7(a) loans, the maximum variable interest rate will usually be based on what the current bank charging rate is. The 2021 prime rate is currently set at 3.25%.
Invoice Factoring or Business Loans, Which is Better for a Trucking Company?
It might be tempting to seize a business loan, especially with a low interest rate. However, please keep in mind that any loan will need to be repaid.
One benefit of invoice factoring is that you’re operating with money that is owed to you already — and an invoice factoring company will pay a large percentage of an invoice upfront while charging a fee for their services. Once the invoice is fully paid you will also be fully paid and only have to sacrifice the invoice factoring service fee. You won’t have to worry about making monthly payments and worrying about whether or not an extensive loan balance is decreasing at a proper rate.
It’s a good idea to utilize invoice factoring for invoices that you know will be paid in the near future. For instance, you will end up paying less if your invoice is ultimately paid within 30 days of hiring an invoice factoring company than you would if the invoice isn’t paid until around the 90 day mark.
Choosing whether or not to opt for invoice factoring or a business loan depends on the expense in question or the source of the need for cashflow. If it’s a smaller dollar amount that is needed, then invoice factoring might be the best option.
Businesses will also want to keep in mind what their current overhead is, how much they owe in loans (if at all), not to mention how much profits the trucking company makes on a monthly basis.
If a trucking company has a low amount of loan debt, then a business loan might be the right option — it all just depends on where your business stands and where it is headed.
How to Choose the Right Invoice Factoring Company
When it comes down to it, invoice factoring is classified as a sale instead of a loan. Although selling invoices to a factoring company might not be the ideal route for a trucking company to take, it can often be the more ideal route than taking out an extensive loan.
When it comes time to make the choice to hire a factoring company, you will want to perform your due diligence to ensure that you end up working with the right personnel to handle the matter to satisfaction.
You obviously want to choose an invoice factoring company with a great reputation, and there are resources available online that will give you an in-depth look at customer satisfaction as well as company culture. When it comes down to it, you’re hiring a third party company to view your client’s sensitive financial records, so you will want to make sure that you choose a factoring company that you can trust.
Generally, an invoice factoring company is going to charge a factor fee for their services. A factor fee is. For instance, if your factor fee is 1% and you’ve given over a $30,000 invoice, you will end up paying a $300 fee. However, with most invoice factoring companies, the percentage rate is going to grow as time goes on, and if you end up hitting a third month with a factoring company, the rate could rise to something like 5%.
You can pretty much count on factor fees ranging anywhere from 0.75% to 5%. The longer it takes your customer to pay off the invoice in full to the factoring company, the higher the factor rate climbs over time.
Do not confuse invoice financing with invoice factoring as they are hardly one in the same. Invoice financing is a loan in which the amount lended is gauged upon outstanding invoices a trucking company has in current possession. Much the opposite, invoice factoring, again, is ultimately a sale.
Cases where invoice factoring might make less sense is if a trucking company owner has outstanding credit and a low debt-to-income ratio. In which cases cash might not be needed as swiftly, in which cases a more long-term loan or even a line of credit might be more suitable since effective interest rates are likely to come in much lower.
When it comes down to it, choosing whether or not to get a factoring company involved in unpaid invoices has to do with circumstance. We hope that taking some of the measures and suggestions mentioned above will help trucking company owners make the right decision to position themselves and their organizations for growth and prosperity. Factoring companies will continue to be available to businesses looking for fast cash flow, which gives trucking companies more flexibility and options in the event that unexpected expenses (or even extensive planned expenditures) arise.
