Slow revenues and thin margins can create a dangerous combination that leaves transportation companies vulnerable to unpredictable events – such as a slow customer payment, a major equipment breakdown, quick payment demands from drivers or fuel increases. Well capitalized companies can handle these events simply by tapping into their cash reserves. But growing companies, or companies with minimal reserves, run the risk of running into serious problems.

You can certainly minimize these cash flow problems by optimizing how you manage your accounts receivable. For example, you should run credit reports to make sure you only work with shippers that will pay for their loads on a timely basis. Additionally, you should always make sure that all the proper paperwork (e.g. freight bill, bill of lading, etc) is in order. Lastly, you should consider offering discounts in exchange for quick payments. But this strategies do have their limitations.

Although optimizing your invoicing processes will definitely help,  most transportation companies will ultimately need business financing to be able to grow and succeed. Usually, company owners will approach their local institution to try and get a business loan. However, getting a business loan in the transportation industry is very difficult for carriers and nearly impossible for brokers. Furthermore, institutions will usually require that the company present three years of pristine financial records. Also, they will only work with companies that have substantial collateral and whose owners have a solid net worth. Ultimately, few transportation companies will be able to meet this criteria.

However, there is a new alternative way to finance transportation companies that has been gaining traction in recent years. It’s called freight bill factoring. Factoring accelerates the cash that is due to your company from slow paying freight bills. It provides the quick liquidity you need to pay for company expenses – such as drivers, fuel and repairs – without having to worry about the timing of your shippers payments.

Freight bill factoring transactions are usually structured as two advances against your freight bill. The first advance usually averages 90% and is paid as soon as the load is delivered and invoiced for. The second advance, which is the remaining 10% less the fee, is paid once the shipper pays the invoice in full.  The factoring fee varies and is calculated based on the credit quality of your shippers, the size of your advances and the volume of invoices that you factor.

Perhaps one of the most important advantages of using freight factoring to finance your transportation company is that it’s easier to get than most conventional forms of business financing. Since factoring companies are funding your invoices – they view them as your most important collateral.  To qualify, it’s very important that your shippers, who pay your invoices, have very good commercial credit ratings. Also, your invoices must be free of any encumbrances created by tax or legal problems.

Freight bill factoring is also very flexible. Most conventional business financing solutions , like lines of credit or business loans,  have fixed ceilings. Factoring lines tend to have ceilings that are directly tied to your sales. This means that the line can grow along with your company, provided that you are selling to shippers that have solid commercial credit ratings. This makes freight factoring an ideal solution for small and medium sized transportation companies that have substantial growth opportunities but don’t have the cash flow to execute on their growth plans.

One way to solve this problem is to start requesting faster customer payments. This can sometimes work, especially if you offer your shippers a discount for paying early. Offering 2% for a payment in 10 days or less is quite common . The problem with this strategy is that you are still at the mercy of your customer who may – or may not – pay quickly.

A second way to solve this problem is to get conventional business financing such as a loan or line of credit. While a line of credit would certainly help address this cash flow problem, they are very difficult to obtain in this environment. Banks are notoriously risk averse and will usually demand strong collateral, a long track record and impeccable financial statements before providing financing. The problem is that few, if any, small carriers (or brokers) will meet this criteria.

A third alternative to solve this problem is to use freight bill factoring, a form of financing that can be used to speed up payments from slow paying shippers. It works by using a third party company, called a factoring company, that provides a cash advance for your slow paying invoices. The cash advance can be used by your company to cover expenses and take on new opportunities. The transaction closes once the customer pays the invoice in full. It’s common for carriers and brokers to factor invoices on a regular basis, thus ensuring smooth cash flow.

One advantage of freight factoring over other solutions is that it’s easier to obtain. The most important requirement to qualify is that your shippers need to have good commercial credit. This is important because their invoice is the collateral that the factoring company is financing. Aside from this, your company needs to be properly established and be free of legal and tax problems. Another advantage of invoice factoring lines is that they can be implemented very quickly. It’s common for a line to be up and running within a week or two.

Perhaps the most important feature of factoring is that it’s dynamically tied to your revenues. This means that the line can increase easily as your sales increase – provided your shippers have high quality credit. This makes freight factoring an ideal solution for small and medium sized freight companies with growth potential whose main problem is that their customers pay slowly.

The biggest problem for most trucking companies and brokerages is cash flow. This problem stems from the fact that most trucking companies and brokerages have immediate expenses but delayed revenues. In other words, they need to pay for drivers, repairs and fuel quickly. On the other hand, customers pay their invoices 30 to 60 days after service. This time gap between expenses and income forces trucking companies to dip into reserves to cover current expenses. And therein lies the problem since few companies have the required capital reserves to cover current expenses for up to 60 days, while growing the company at the same time.

The obvious solution to the problem is to reduce the time it takes for customers to pay you. This is easier said than done since customers like being able to pay in up to 60 days. It helps them with their own cash flow. One strategy is to offer the customer an incentive to pay quickly, such as a discount if they pay within 10 days. It’s a good strategy, if your customers are willing to work with you. You will still be at the mercy of customers who may change their mind and opt out of the discount (and early payment). For many, the better solution is to use business financing.

There is one business financing solution that solves this cash flow problem and has remained available during the credit crunch. It’s called freight bill factoring. Freight bill factoring allows you to have the equivalent of a quick pay on your freight bills, without having to worry about convincing your customers to pay quickly. So instead of waiting 60 days to get paid, you can get paid in a few days. This strengthens your cash flow and helps ensure you have the funds to meet current expenses and take on new loads.

Freight factoring works by using a financial intermediary called a factoring company. The factoring company advances funds based on your freight bills and holds the invoices until your customer pays in full. Once your customers pay, the transaction is settled. The factoring company’s main collateral is the creditworthiness of the invoices it finances. This makes it a good solution for small carriers and brokerages whose biggest (or only) asset is a strong list of customers can benefit from this solution.

Factoring is an ideal solution for carriers and brokerages whose biggest challenge is not being able to wait 60 days for clients to pay their invoices.

If you don’t want to get business financing, your only two options are to either restrict growth or to convince shippers to pay sooner. Actually, it’s not unusual for some shippers to offer a quick payment option if you give them an incentive discount, such as 2% off if they pay in 10 days or less. This strategy can work well but it will leave you at the mercy of your shippers. Your company could run into problems again if they decide to stop taking the early payment discount.

Another alternative is to address the cash flow problem directly using freight bill factoring. This financial product provides the equivalent of a quick pay by using an intermediary company called a factoring company, which provides a quick payment for your freight bill and holds it until your shipper pays. Using freight factoring can improve your cash flow substantially by reducing the amount of time you wait to get paid for your freight bills.

Most freight factoring transactions are done in two installments. Your first installment of 90% of the invoice is provided to you as soon as you send the invoice to the factoring company. The remaining 10%, less a service fee, is paid as a second installment once the invoice is paid in full.

One feature that makes factoring an attractive option is that it’s easier to obtain than most conventional business financing products. The most important requirement is that your shippers must have a good commercial credit rating, since factoring companies advance funds based on your shippers ability to pay. Since solid invoices from good shippers are the factoring company’s preferred collateral, small and growing companies that have good clients can usually qualify for this solution.

Freight factoring can be an ideal solution for transportation carriers whose main issue is that they can’t afford to wait for their clients to pay because they need the funds sooner.

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.

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.

Although running a freight brokerage can be very profitable, the business is very cash flow intensive. You need to keep your drivers happy, which means they need to be paid quickly. In the meantime, your large corporate customers will demand that you give them net 30 payment terms. In other words, your drivers want you to pay them quickly and your shippers want to pay you slowly. As a freight broker, you are expected to manage that payment discrepancy and keep all parties happy.

Few startup or growing brokers can afford to wait 30 days to get paid by their clients. Simply, they don’t have the funds to cover the operating expenses of the business. This is a big limitation for them and prevents them from growing the business and capitalizing on opportunities. To complicate matters, getting business financing for a freight brokerage is very difficult. Few banks will provide business loans to the industry in part because they don’t have hard assets (i.e. real estate) to use as collateral. Either way, a business loan is no necessarily the best solution either.

A better alternative for many freight brokers that have cash flow problems is to use freight factoring. This solution is designed specifically to help companies that have clients that pay in 30 days but need the funds sooner. Freight bill factoring provides a cash advance on the net 30 invoices, providing the necessary funding to pay drivers and other business expenses in a timely fashion.

One of the most attractive features of freight factoring is that most freight brokers can qualify for it – even startups. This is because factoring companies consider your freight bills from strong shippers to be your best collateral, and they are usually happy to advance funds against them. This means that brokers with few assets except a strong roster of shipping clients can usually qualify. Aside from having strong shippers, most factoring companies will only work with freight brokerages that have no lawsuits, judgments or liens.

Freight bill factoring is an ideal solution for freight brokers and transportation carriers who can’t afford to wait 30 days or more to get paid by their clients.

One way to handle slow payment is to try and negotiate a quick pay – basically asking your clients to pay quickly. Some will do it. Others won’t, or at least will only offer it if you give them a discount. Although they are not always reliable, negotiating a quick pay can be beneficial in most cases.

If quick pays won’t work, your best alternative is to secure business financing to ensure you always have funds on hand to cover business expenses. This can be difficult for most owners since institutions require that all applications have stellar credit, assets that can be held as collateral and many years of experience. This will rule out business loans as an alternative for most small and midsized trucking companies. However, this is not necessarily a big problem since a business loan is not always the solution to this problem.

For many, freight bill factoring will be the better alternative. Freight factoring, as it is commonly known, can provide the equivalent of a quick pay by using an intermediary. The intermediary, called a factoring company, advances you funds against your freight bill. The transaction is settled once your client pays the invoice in full.

One of the advantages of freight bill factoring is that it provides predictable cash flow, enabling you to comfortably handle your business expenses. It eliminates having to worry about when your clients will pay.

To qualify for freight factoring you need to work with credit worthy clients. Also, your company needs to be free of liens, judgments and other encumbrances. Because of this, freight bill factoring is an ideal solution for small and growing trucking companies and freight brokers.

There are two common ways to deal with this cash flow problem. The simple solution is to ask clients for a quick pay. Unfortunately, the simple solution is not easy at all. Clients have the upper hand and will usually demand to 30 day terms or threaten to take their business elsewhere. The second solution involves using business financing to close the gap in the cash flow. The problem with this strategy is that business loans are not easy to obtain in this environment. Most institutions will only make a business loan to a company that has a solid multi-year growth record, outstanding financials, substantial assets and a well seasoned management team. Few transportation companies can meet all these criteria.

There is a better way to solve the problem by using a solution that provides the equivalent of a quick payment. It’s called freight bill factoring. It works by using a financial intermediary called a factoring company, who advances funds against your freight bills. They settle the transaction once your client actually pays the bill. One advantage of factoring is that it provides the equivalent of a quick payment, without requiring your clients to pay faster. This makes it easy to integrate in most organizations.

Freight factoring is easier to get than other forms of financing. To qualify for this type of financing, your business must have solid commercial clients, be free of lawsuits and encumbrances and have good growth and stability potential.

In summary, you have regular expenses but irregular income. This creates a gap that is opened at expense time and closed once the income arrives. And unless you have enough funds to cover the gap, your trucking company will run into serious problems.

One way to cover the gap is to get clients to pay sooner. This can work sometimes, provided the client is willing to pay quickly. If they are not, your only alternative is to get business financing. This can be very challenging, especially in the current lending environment. Getting a business loan is a long complex process that has a lot of uncertainty. Fortunately, small business loans are not your only option.

If your biggest challenge is that you can’t afford to wait for your clients to pay, you should consider an alternate form of financing called freight factoring. In essence, freight factoring is the equivalent of getting a quick pay. But the quick pay does not come from your client, it comes from the factoring company.

The transaction is fairly simple. You sell your invoice/freight bill to the factoring company, who gives you an initial advance of 90% of the invoice. This advance can be higher in certain circumstances. You get the final advance of 10% (less the factoring fee) once your client actually pays the invoice.

One of the big advantages of freight factoring is that most factoring companies look at the credit quality of your invoices as your most valuable asset. This is very important – because small companies with a solid roster of clients can usually qualify. One further advantage is that a factoring program can be set up quickly – usually in about a week.

In conclusion, freight factoring can be an ideal solution for business owners that cannot afford to wait 30 to 60 days to get paid.

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