Although the recession has been technically over for a while, finding business financing remains almost as challenging as it was during the worst part of it. This is due to a combination of lending institutions being in bad financial shape and lenders being more conservative in their lending. In the end, they only provide business loans to companies that are in pristine shape. That means that companies need to have two to three years of positive financial statements, have strong cash flows, strong assets and a seasoned management team. However, few companies have survived the recession unscathed and most can’t meet these requirements. If a company is viable but has a less than perfect past – what are their options?

Most companies that look for financing tend to have a similar problem – poor cash flow. This problem starts (or worsens) when customers start paying their invoices late or asking for longer payment terms. Invoices that used to be paid in 15 to 20 days, now get paid in 30 to 40 days. Some customers may take up to 60 days to pay an invoice. In the meantime, the company still needs to cover all their current expenses.

This can put a company in a precarious position, especially if it does not have strong cash reserves. They risk missing a critical supplier payment or worse, missing payroll. One way to fix this problem without using a business loan is to use invoice factoring.

Invoice factoring provides an advance for slow paying invoices. This provides the company with the necessary funds to meet supplier payments and other expenses. More important, it stabilizes cash flow by providing predictable invoice payments, allowing the company owner to focus on growing the business.

When cash flow is tight, owners fret over taking on new business and adding customers because they are unsure if they will be able to cover expenses until the client pays. Invoice factoring solves this problem – allowing the business to take on new clients and grow.

Integrating factoring to a company is fairly easy. Usually, the factoring company will give you an advance of up to 85% on your invoice as soon as the work is completed. The remaining funds, less the fee, are rebated when your customer actually pays.

Qualifying for factoring is much easier than qualifying for other types of financing. The most important requirement to qualify is to do business with customers that have good commercial credit. Aside from that, your company needs to be free of liens, judgments and tax problems.

The transportation industry was very affected by the recession that finished in 2009. Although the recession has formally ended, the credit crunch that started with the recession is still ongoing and will remain so for the foreseeable future. Although some banks are lending more, for the most part, getting business financing remains very difficult. This is especially true for transportation companies and not likely to change in the near future because a number of lending institutions are still in trouble themselves.

To qualify for bank or institutional financing the carrier needs to show a few years worth of profitable operations, strong growth, strong assets and have a good management structure in place. Unfortunately, few of the carriers and brokers that weathered the recession will be able to meet all these criteria. Fortunately, conventional business loans are not the only financing option for this industry. And in many cases, it may not be the best option either.

Most freight carriers and brokers experience cash flow problems because they cannot afford to wait 30 to 60 days for customers to pay their freight bills. Most transportation companies have heavy ongoing expenses – there are drivers to be paid, trucks that need repair and a number of other expenses. It’s not unusual for undercapitalized carriers to run into cash flow problems because they can’t afford to wait for their freight bills to be paid. One way to fix this problem is to implement a freight bill factoring program.

Freight factoring solves this cash flow problem by providing you with an advance for your freight bills. Instead of waiting 30 to 60 days to get paid by the shipper, you can get up to 90% immediately from the factoring company. This provides you with the cash you need to pay your drivers and cover your business expenses. Once your shipper pays the bill in full, the factoring company rebates the remaining 10%, less a small financing fee.

One of the advantages of freight factoring is that is fairly easy to obtain and it does not have the burdensome qualification requirements of conventional business financing programs. The most important variable for qualifying is having customers with good commercial credit. This is your most important collateral from a factoring standpoint. Additionally, the business and its owners need to be free of legal and tax problems. This makes freight bill factoring an accessible solution for new and established freight companies that are looking to grow.

Most new and growing transportation companies have one thing in common – cash flow problems. Unless they have a quick pay set up with their clients, most freight shippers and carriers can expect their bills to be paid in 30 to 45 days. This can be a problem for many because they have to bear the costs of delivering the freight and then carry all the company expenses while waiting to get paid. The company needs to have a substantial cash cushion to be able to absorb all the costs – or risk delaying important payments.

One way to solve this problem is to cover the time gap with business financing. The challenge with conventional business financing is that it’s very difficult to obtain, especially in today’s environment. Most lending institutions will scrutinize every detail of the company before making a business loan. This means that to qualify, your business will need to have at least two years of positive financial statements, strong assets and owners with a solid background. Startups and small freight companies will have a tough time meeting these requirements.

There is an alternative solution to this problem though. You could factor your freight bills. This eliminates the anxiety of waiting for your customers to pay. It can provide predictable cash flow ensuring you have funds to pay for drivers, fuel and repairs. And as opposed to most conventional financing, freight bill factoring is relatively easy to obtain.

Freight factoring offers a fairly simple proposition. A factoring company provides you with an advance for your freight bills. They hold them as collateral while waiting for the customer to pay. Once the freight bill is paid, the transaction is settled. Usually, factoring companies advance about 90% of the freight bill once the load is delivered. You get immediate funds. The remaining 10%, less the factoring fee, once the customers pays the bill in full.

The transaction flow usually works as follows:

1. You send the freight bills and documentation to the factoring company
2. The factoring company advances 90% of the invoice and deposits it in your account
3. The factoring company verifies the invoices mails the freight bills to your client for payment
4. Your client pays the invoice in full. You receive the settlement of 10% less the factoring fee

There are two key areas where factoring differs from other types of financing. First, the factoring company verifies the invoices to ensure they are accurate (step #3). This is a critical step since the invoice is the collateral for the transaction and it must be verified before funding. Second, the client usually sends the payment for the freight bill to the factoring company, on behalf of the client, rather than to the client directly (step 4). This enables the factoring company to then settle the transaction and close it. Freight factoring is relatively common in the transportation industry and most shippers understand the need for factoring and are comfortable working with these procedures.

Another important difference between factoring and conventional financing is how collateral is evaluated. In a factoring transaction, the freight bill is the collateral in the transaction. Factoring companies will look at the credit of your customers very closely to determine eligibility and invoice quality. Only those bills coming from credit worthy customers can be financed. The advantage of this, is that a transportation company can use their customers credit to their own advantage. A small freight carrier or broker with a solid roster of customers that may not be able to get a business loan but will usually have a good chance of obtaining factoring.

Going through the business loan application process with a financial institution can be a challenging and time consuming task. Preparing the application package usually requires a lot of effort and time while you collect the relevant information – past tax returns, financial statements, sales projections, management team biographies and so on. But getting financing is usually critical for the success of the business, so the business owners and managers go through the process. So what do you do if after all the effort you invested in getting a business loan, your application is declined?

The biggest mistake business owners can make at this point is taking it personally and losing their calm. The smart approach is to keep calm and detached. Although easier said than done, this is an important step that may help you get the funding you need. Your next step is to try and find out why the application got rejected. Sometimes, lending officers won’t want to go into details about your rejection because they fear offending the client. However, this information can be critical for your success, so try to persuade the lending officer to give you some details – but do so in a friendly manner. One approach that can work in this circumstance it to say something along the lines of ” I understand that your institution won’t be able to help me. However, I plan to apply at another institution. Could you help me understand how to strengthen my application?” Then be quiet and listen carefully. The information the lending officer provides you will be very valuable and will help you in your subsequent applications.

Once you have gathered this information, you should meet with you financial professional and re-assess your application and needs. This is very important, unless you are a financial professional yourself, you should get the advice of one. You should also decide whether you should re-apply for a business loan or an look alternate business financing product.

One alternative source of business financing that has been gaining traction during the recession and ensuing credit crunch is invoice financing. This tool can help businesses that are having cash flow problems caused by customers are paying their invoices more slowly. Many times, invoice financing can be used as a stop gap solution to help shore up your business while you look for a more permanent business financing solution.

One last thing to keep in mind is that a number of lending institutions are in bad financial shape and are only lending money to their absolute best customers. In this case, a business loan application rejection may be more a reflection of the financial health of the institution, rather than that of your business. If you plan to obtain bank financing, it’s a good idea to go to the FDIC’s website (www.fdic.gov) to check out the health of the bank. You will need a financial professional to help you review the data, but it will save you time by allowing you to focus only on healthy institutions that have the capabilities to make loans.