Our FREE Guide to Factoring for Trucking Companies – Everything Trucking Companies Need to Know About Factoring
Introduction: Welcome to our free guide to factoring for trucking companies
You will find in this article, everything you need to know about what factoring for truckers is, how it works, why it is important, and how to find factoring companies who specialize in factoring for the trucking industry.
Understanding factoring for trucking doesn’t need to be difficult. Trucking companies use factoring to get some of their money faster than they could if they wait for clients to pay their invoices. That is what factoring does – provides truckers a way to get at the money they are owed more quickly than waiting for customers to pay their invoices.
It can take thirty, sixty, and even ninety to one hundred twenty days for clients to pay truckers what they owe. That is a long time to wait for your money. Especially since day-to-day expenses continue accumulating while you are waiting for your clients to pay their bills.
Rather than trying to endure the wait, trucking companies sell their invoices (the money they are owed) to finance companies who then collect the money later. Essentially, the way factoring works is, the finance company “gets paid” to do the waiting. They buy your invoices, you get money right away, and the factoring company gets paid 30, 60, 90 days down the road.
More About Factoring for Trucking Companies
Factoring is a type of financing that allows businesses to sell their accounts receivable (invoices) to a Factoring Company at a discount. This provides the business with an immediate infusion of cash, which can be used to cover operating expenses like fuel and payroll.
Is Factoring for Truckers a Loan?
Factoring is not a loan. There are no monthly payments to make.
Do I Need Good Credit to Apply for Factoring for Trucking Industry?
Factoring Companies are usually willing to factor invoices from businesses with good credit, but they will also consider businesses with less than perfect credit. This is one of the reasons factoring began – because traditional lenders are not as agile as private financing companies, and have different lending standards.
What Does a Freight Factoring Company Do?
A factoring company will purchase your freight invoices for a fee. The funding you receive can be used to cover fuel, driver pay, truck repairs, or any other expense.
Here is How a Freight Factoring Company Works
- A customer hires you to ship freight from one location to another.
- You do a credit check with your factoring company to see if the customer’s load qualifies.
- Once you complete delivery, you send the invoice and paperwork to the factoring company.
- They purchase that invoice, and your company receives cash right away.
- The factoring company then collects the payment from the customer.
There are two types of Factoring: Recourse and Non-Recourse.
Recourse Factoring is the more traditional type of Factoring, and it is the type that is most often used by businesses. Recourse factoring is simple to understand: If the customer doesn’t pay their bill, the freight company must pay the factoring company. With non-recourse factoring, if the bill isn’t paid, the freight company is not responsible.
As you can imagine, with non-recourse factoring, factoring companies will normally only advance a portion of any given invoice, and they will generally charge higher rates since they can get stuck with a client who doesn’t pay their bill.
Recourse factoring for trucking companies however offers an opportunity to factor almost the entire invoice amount (generally) and offers lower fees because if the client doesn’t pay their invoice, the freight company must pay the factoring company the amount owed to them.
Factoring can be a helpful tool for businesses, especially businesses who have to do work up front and incur costs, but don’t get paid until later.
What Are the Benefits of Factoring for Trucking Companies
The best benefit of factoring is that it allows truckers to get paid immediately, rather than waiting for their customers to pay their invoices. This can help improve cash flow and make it easier to cover expenses and make payroll.
Why do Trucking Companies use Factoring?
To manage cash flow so they can continue growing and avoid going out of business. Businesses don’t close from lack of profit, or even lack of sales. Businesses close when they run out of enough cash or credit to continue putting fuel in their trucks and pay their employees.
We saw this in July 2023 when Yellow, one of the largest trucking companies in the world suddenly closed its doors. What were they struggling with? Paying employees, fuel, and keeping their trucks on the road. They simply ran out of cash.
Don’t make the mistake of thinking that cash flow struggles are only for smaller owner operators or companies with only a few trucks. When your trucking company has cash flow problems, the more sales you make – the bigger the cash flow problem becomes.
In fact, if you read about some of the largest trucking company bankruptcies in history, you will see that they ran out of money to pay bills and pay for payroll and shut down.
It Is Expensive to Operate a Trucking Company?
Prior to all these massive changes that are impacting the cost of operating a trucking company since Covid hit, The Truckers Report put out the following infographic (shared with permission of The Truckers Report), with some numbers that are a good place to start as far as trying to determine how much it is going to cost you to operate one single truck for one year.
According to The Truckers Report, it costs about $1.38 per mile, or $180,000 per year to operate one commercial vehicle, with the greatest expense being diesel fuel. See the Infographic below for a breakdown of costs for one truck (per year).
The Real Cost of Trucking – Per Mile Operating Cost of a Commercial Truck
Covid Increased the Cost of Operating a Trucking Company
It is expensive to run a trucking company. Operating expenses for trucking companies include fuel, maintenance, tires, insurance, licenses and permits, and driver pay.
Historically, fluctuating fuel costs have been enough to bankrupt many truckers. But since Covid trucking companies have had to endure wildly fluctuating fuel costs AND many more cost challenges.
A lack of availability of experienced drivers increased the cost of hiring drivers. Then there weren’t any new trucks for sale, and if you could find one, their costs had skyrocketed. This forced truckers to keep repairing and rebuilding old equipment. But then there was a lack of availability of parts which drove the costs of parts up too. This made repairing trucks difficult and extremely expensive.
It has always been challenging to run a trucking company, but today, trucking companies face more challenges than ever as the amount they can charge consumers is not keeping up with the cost of trucks, parts, fuel, and driver pay.
The Basic Cash Flow Problem for Truckers
And on top of the expenses of running a trucking company, very few trucking companies get paid up front for their work (if any). You must deliver the load, and then invoice your customer, and then wait for them to pay you.
This is the basic cash flow problem for trucking companies – lots of money going out of your bank account (or onto your credit cards) to cover the cost of operating a trucking business, and no money coming in until your customer pays their invoices, which can be anywhere from thirty days to six months.
But the trucking industry is not alone in their cash flow struggles. Most businesses experience similar cash flow issues. Any time you have money going out immediately to cover the cost of performing your work, but don’t get paid until later, you are going to have a cash flow issue.
This is the general cash flow problem for truckers – money going out fast and coming back in slow. If you understand this problem clearly, it will also make you a better businessperson.
People in business often talk about cash flow, but few of them truly understand what it means. When most people say, “cash flow,” what they are describing their sales going up or down, but this is not cash flow at all.
Cash flow is an accounting term used to describe the “flows of cash” into and out of your business. Remember this: cash flow is “money flowing in and money flowing out.” That is all it means.
When your money is “flowing out” quickly and “flowing in” slowly, you tend to have “cash flow problems.”
Why? Because the money is “flowing out” faster than it is “flowing in” and if this continues to happen you will run out of cash to pay your bills.
Remember, when you can’t pay your bills, you are out of the game. It doesn’t matter if you have a large sum of money guaranteed to you some time in the future – when you don’t have any of it in the bank, you can’t pay for fuel or make payroll and your business is done.
What Causes Cash Flow Problems for Trucking Businesses?
Cash flow problems for Trucking Businesses are caused by the “timing” of when they get paid (money flowing into their bank account) versus the timing of when that money gets spent (money flowing out of the bank account).
Understanding the Timing Problem
When you get an order for a load, you first must have a truck and driver ready to go, fuel up, get the load onboard, deliver it to its destination. And you must pay for all of that up front. This is cash flowing out.
But when does cash flow back in from this work you’ve completed? First you must invoice the customer, and then wait for the customer to pay what they owe.
This is the cause of the “timing problem” which creates cash flow struggles for truckers. While you are waiting to get paid from your last load, you are hopefully taking on new contracts for new loads. But then you are laying out cash again to pay for that fuel, and that driver’s salary, which creates even more expense – and you are still waiting to get paid from previous jobs.
Because you get paid slowly by your customers, but you spend your money at regular intervals on bills and operating expenses, you have a situation where the “timing” of money coming do not match the “timing” of money going out, which creates cash flow problems.
This isn’t a problem that is unique to the freight industry; most businesses have this kind of cash flow challenge.
Lawyers who work on a contingency fee basis may work for years on a case, incurring massive expenses along the way, conclude the case, and then wait YEARS for the defendant to pay them.
Hospitals must provide services first and bill for those services later. They often must wait over sixty days to receive cash for services they performed from insurance providers or six months to be paid from Medicare or Medicaid.
Any business who does work up front and then waits to get paid is going to have to learn how to manage cash flow. To solve their cash flow challenges, trucking businesses need to find ways to “finance the gap” between the customer ordering a load delivered and paying for it.
One way to do that is to factor your invoices with a factoring company instead of waiting for your customer to pay their bills.
It is important to understand that you can’t do anything with “money you are owed.” You must convert invoices to cash to be able to spend it.
Think about it – businesses like Uber and Amazon.com do not have cash flow problems. Cash flows into those businesses every minute of every day from around the world. They always have massive amounts of cash on hand to grow, hire, and expand. Why? Because they get paid up front and do the work afterward.
Neither of these companies has great profits – in fact Uber has not turned a profit yet, and Amazon didn’t turn a profit for twenty years. But they are still in business. Why? Because of the cash flowing into their businesses every single day.
Financing “The Gap” to Solve the Cash Flow Problem for Freight Companies
Financing “The Gap” using Credit Cards
Many truckers try to finance their cash flow with credit cards. This is particularly true of newer owner operators and small trucking businesses. Basically, they are putting their expenses on high interest credit cards to finance operations until their customers pay their invoices.
There are some challenges with this approach. The main one is, credit cards can limit the growth of your business by not granting you enough credit. Because of this you might miss out on some opportunities until you get a credit increase or get your cards paid down with your next load. This will forever limit your growth.
Credit Score – credit cards are dependent upon your credit score. And the higher your balance is on your current credit cards, the less likely you are to get a credit increase or qualify for an additional credit card.
Interest Rates – Interest rates are incredibly high on credit cards, eroding your long-term buying power.
Credit Card Company Suddenly Close Your Account – most people who are new to credit cards don’t know this, but credit card companies change their lending standards regularly without telling people.
And when this happens, as soon as you pay off a credit card, they close your account. That’s right. One day you pay off your credit card just like you always do, and they close the account (without telling you). This happens every day.
This has a two-fold impact. One, you lose access to that credit line for funding operations. Two, it throws off your debt-to-equity ratio, and almost always causes your credit score to decline. This in turn limits your ability to get a new credit card, or if you can get a new card, it increases your interest rate, and possibly annual fees.
As you can see, financing your entire freight business operation with credit cards can have some issues. We aren’t saying you shouldn’t have business credit cards. In fact, you should use every financing option available to you. Just know the strengths and weaknesses of each financing option so you can make the best choices for your business.
Using Business Lines of Credit and Business Loans for Cash Flow Management
A line of credit is an “open” or “revolving” loan from a bank of financial institution that allows you access to cash when you need it. Unfortunately, as a trucking company, you may find that trying to secure a business loan or a line of credit is not that easy to do; especially during your early years.
Banks often require applicants to present non-liquid assets, like your trucks, your terminal, or your house as collateral to guarantee they get their money back. If you don’t pay, they can at least sell your assets to offset their losses.
If you perform a search on the internet for “business line of credit for truckers” you might notice that banks do not show up on the first page of Google. No financial institution shows up at all on the first page of search results.
Most of what you see are articles about how hard it is to get a business line of credit or, advertisements for private equity firms offering capital loans. This tells us that banking institutions may not be that interested in marketing a business line of credit truckers as an important part of their business strategy.
If they did, those banks would show up on the first page of search results, but they don’t. In fact, you won’t find traditional banks listed hardly anywhere on the internet if you are looking for a business line of credit as a trucker.
Does this mean you cannot receive a line of credit from a traditional lending institution? Not at all. Over time as your business grows, establishes a history of revenues, develops a strong balance sheet, and has assets to use for collateral, you will find it easier to obtain financing (including a business line of credit) from banks and other lending institutions. But until then, it is not going to be easy to get a line of credit.
Why Use Factoring for Trucking Companies Instead of a Line of Credit?
A line of credit is fantastic for many enterprises. However, there are a few benefits to factoring that make it preferable for trucking firms over a line of credit:
- A line of credit is difficult to obtain, especially for smaller or new trucking companies.
- A line of credit can put a ceiling on how much you’re able to spend. If your business surges, it may be hard to increase that limit quickly enough to cover the new expenses. With factoring, there is no set limit—you can factor as much or little money as you need at any given time. And if your receivables are healthy, you could qualify for up to 99% of each invoice’s value.
- When you have a line of credit, your debt-to-equity ratio lowers, making it harder to be approved for loans in the future. This is because when lenders see that you already have borrowed money, they become less likely to give you more. Factoring doesn’t appear on your credit report, so using this method won’t impact your chance of borrowing again later down the road.
- Lenders are constantly changing their lending standards, which can result in your business credit card or line of credit being closed without notice. But with factoring, you aren’t applying for credit, and there is no account to “close.” As long as you have invoices owed to you, you can factor part of them to manage your cash flow.
Factoring Can Help Trucking Companies Take on New Clients
Factoring can help trucking companies take on new clients. When a trucking company takes on a new client, there are often a lot of expenses involved. If the trucking company does not have the cash to do this, it may be unable to take on the new client. However, if the trucking company has access to factoring, it can use this funding to cover the upfront costs and take on new clients without any financial difficulty.
This is true for a lot of businesses. Because taking on a new client often creates a lot of new expenses, some businesses avoid opportunities that come along because they know they can’t afford the additional expense a new customer is going to bring.
This is particularly true of larger customers who are used to stretching out their vendors to sixty or ninety days before they pay their invoices. Being slow to pay is not an uncommon practice for large corporations. It’s as if they feel that doing business with them is a privilege and so you shouldn’t be surprised that they make you wait longer to get paid by them. For a lot of trucking businesses, slow payers can feel like death by a thousand cuts.
But if you have access to capital through a factoring company, you can afford to take on new clients as well as bigger clients because factoring will help you get some of your cash in the bank right away so you can continue growing with confidence, knowing a large new client isn’t going to bankrupt you while you wait on them to pay their invoices.
Factoring Can Help Trucking Businesses Grow
You’ve probably heard the phrase “opportunity waits for no one.” This is true. You need to be prepared if you want to capitalize on new opportunities. Being prepared might mean having more trucks and drivers than you currently have business. It might mean keeping plenty of cash on hand to enable you to fund new business opportunities as they come up.
But if you are always short on cash because you are constantly waiting on your customers to pay you, it makes it challenging to take on any new opportunity. After all, you can’t buy new trucks or hire new drivers with “money you are owed.”
Because of this, many small trucking companies tend to stay small. They are afraid of new customers and particularly of big customers. They know they can’t afford to service these types of clients because they are always tight on cash, and each new load creates new expenses.
But if you factor your freight invoices, you can get money in the bank quickly. The factoring company gets paid to “do the waiting” for you, and you get to keep growing and expanding.
Business owners who think small tend to stay small. Large companies never hesitate to finance their future operations using “other people’s money.” They sell stock, bonds, take on debt, solicit private equity investors, and take out loans to finance their growth.
No large business attempts to finance their future growth with their own limited cash reserves. They “leverage” the power of other people’s money to help catapult them forward. If big business does this, why wouldn’t you?
Trucking Factoring Companies
Trucking Factoring Companies are also known as Freight Factoring Companies and/or Factoring Companies (who specialize in the trucking industry) i.e., a Freight Factoring Company or Trucking Factoring Company.
The best freight factoring companies and factoring companies in general will be well established, understand freight factoring, offer a competitive factoring fee, and be easy to work with. Their contracts should be easy to understand and agreeable for your business.
It is important to know that every freight factoring company sets their own rates and very few of them publish those rates. Because of this, rates can vary significantly. It is important to shop around when considering trucking factoring companies. They are not all the same, and they all have different rates.
Another good way to choose trucking factoring companies is to read their online reviews if they are available. These can provide good insights into how a trucking factoring company operates, and if they are agreeable to do business with.
Freight Factoring Rates
If you do some research online you will find website suggesting trucking factoring rates ranging from 1-5%. But the truth is, factoring companies rarely publish their rates, and there are a lot of variables that cause factoring rates to increase or decrease. These include size of the load, history with the trucking company, credit worthiness of the customer, and more.
For this reason, it is important to shop around when considering which trucking factor to work with. Freight Factoring companies all set their own rates. They have varying fee structures. Some will have set up fees and other fees. Some offer recourse and non-recourse factoring. Some offer only one or the other.
Just as banks and credit card companies have different rates of interest, factoring companies have different rates and different fee structures. Because of this, you shouldn’t put much belief in what you read online about rates. You need to contact individual factoring companies to find the best factoring company for freight.
Summary – A Complete Guide to Factoring for Trucking Companies
Factoring for trucking companies is a great way to ensure positive cash flow.
Factoring is when a trucking company sells its invoices to a finance company—the ‘factor’—in exchange for quick payment. Sometimes payment can be received within 24 hours. The factor then collects payment from the trucking company’s customers.
There are two types of factoring: recourse and non-recourse. With recourse factoring, if the factor is unable to collect payment from the customer, the trucking company is responsible for paying back the invoice. Non-recourse factoring means that the trucking company is not liable if the factor is unable to collect.
Factoring is a great option for trucking companies because it is easy to obtain and there is often no set limit on how much you can factor. Additionally, using factoring will not impact your chance of borrowing again in the future like taking out a loan would. And finally, rates for factoring are typically lower than the interest rates of credit cards or lines of credit.
If you’re a trucking company owner looking for a way to improve your cash flow, look into factoring! It just might be the solution you’ve been searching for.
About Factoring for Trucking Companies with Balanced Bridge Funding
Does Balanced Bridge Funding Offer Recourse and Non-Recourse Factoring?
Balanced Bridge Funding does not offer non-recourse factoring for trucking companies. We only offer Recourse Factoring for Trucking Companies.
How to Begin Factoring for Trucking Companies
To get started using our factoring for trucking products, we will need to receive a copy of your application, business formation documents, proof of operating authority and insurance owner’s driver’s license. Once we receive these documents and you pass a clean public background search, we are able to factor trucking companies’ receivables for you.
Ongoing Factoring for Trucking Companies
Once you have worked with us on your first advance, things become even easier (and faster) for you. For each request for trucking factoring, we will need to all relevant documents for the completed job, this can include, rate confirmation sheet, invoice, dump tickets, etc.
Fast Approval for Factoring for Truckers
Approval of each request occurs in hours and the funds will be wired directly into the account via ACH or wire transfer (for an additional fee).
What Percentage of an Invoice will Balanced Bridge Factor for Trucking Companies?
We will purchase up to 99% of the value of the invoice.
How Does Balanced Bridge Handle Repayment of Factoring for Truckers?
For repayment, we can either submit the invoice ourselves for payment or you can remain the main contact and then we will automatically pull the repayment amount directly from your account when the invoice has been paid.
Quick Summary of Steps to begin Factoring for Trucking Companies with Balanced Bridge Funding
- Submit application and entity documents to get company approval – usually completed within 1-2 days
- Submit supporting documents for each invoice – receive approval within hours of receipt
- Funds are wired immediately to account (if they pay the wire fee) otherwise funds will be deposited directly into account via ACH within a couple of days
- When invoice has paid, the repayment amount will be pulled directly from the account via ACH or sent directly to us
Balanced Bridge Funding – Trucking Factoring Rates
We do not publish our Trucking Factoring Rates online and we hope you will understand. The market changes dynamically in the transportation industry, and our rates change with it. But you can rest assured that Balanced Bridge Funding is always competitive and offers great rates for your Trucking Factoring. Contact us today to complete your application and receive your funds quickly and efficiently.