Factoring For Your Trucking Business

     

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When would you need to consider factoring for your trucking business?

Are you sitting there looking at your accounts receivables that are out in the pipe line due to you Net 30, Net 60 or even Net 90? Are you wishing the days on the calendar would speed up?

You disagreed silently to yourself but to the new big name customer you agreed to accept payment Net 90 to land the new line of business.

Sixty days and 40 loads later you are feeling the pain of using your cash reserves to move the customer's loads.

The calendar yells 30 more days before the payments from the loads moved the first 30 days start rolling in from this new account. You frown when you see on the schedule that 20 more loads will need to be financed by your company before you see a single dime.

Yeah, dealing with the big companies can be quite lucrative and a feather in your cap. However, they will put off paying their bills (your account receivables) to the last possible moment to use the money to generate interest income for their company.

Still, you're super happy for the new line of business but growing uneasy somewhat after reviewing your operating reserves. You see cash on hand is running way too close to the minimum cash flow balance needed to meet your monthly obligations to even consider adding two more big rigs to your fleet.

If only you had the profits for the first 40 loads generated with the new account and the operating capital back in your hands, you could add more equipment to ask the new customer for even more loads or go land the next big account. 

After all, the new customer as one of your clients can be used to prove that you can deliver and you need to strike while the iron is hot. You just heard through the grapevine that Company X is not happy with the present transportation company moving their loads.

Your banker is putting too many conditions in the way to make getting a loan with cheaper interest the financing method to grow your business. There is a limited time frame to land Company X's line of business.

This might be a time where you might be willing to consider using a factor who will charge you service fees and sometimes even interest charges to buy your pending accounts receivable invoices.

You will have to weigh the merits of sharing your profits with a factor in exchange for receiving the capital advance needed to grow your business.

Discuss with your banker and with a factor whether factoring will hurt the financial reputation of your company. Keep in mind your customer whose invoices will be sold to the factor will typically be contacted by the factor to claim ownership of the pending accounts receivable invoices.

Your customer's credit worthiness will weigh heavily on a factor's decision to do business with you and what fee rate assessments to charge for the service.

With that said and you are ready to raise capital by using a factor, you will typically run across 2 types of factoring, Non Recourse Factoring and Recourse Factoring.

With Non Recourse Factoring, expect to pay more for service fees and interest fees because the factor will be on the hook for collecting the invoice amount from your customer. You'll most likely pay for the factor's insurance policy guaranteeing payment for the invoices.

Recourse factoring will have cheaper fees for you to pay to get an advance on your outstanding accounts receivable invoices. You will remain on the hook by guaranteeing payment of the invoices yourself in the event your customer defaults on payment. Maybe you need to buy the insurance policy to protect yourself with this type of factoring.

Weighing the option of using factoring for your trucking business is not an easy decision but companies do use it to raise capital.

Read the fine print, ask a million questions and then read the fine print again.