When you first open a trucking company, you will find that the expenses can be overwhelming. You have to purchase or finance a fleet of trucks, you have to find a space to work, and you have to hire drivers.
You will need furniture for your office, and you will have to hire salespeople and take out advertisements to get your first clients.
Almost anyone will take out a small business loan when they are opening a trucking company. However, as bills pile up, it is only natural to consider taking out a second loan or a corporate credit card. Before you do any of these things, consider truck factoring.
Truck factoring involves selling invoices to a company for a reduced fee. According to Simplex Group, it is one of the least complicated and fastest ways for a trucking company to pay its bills.
Why Factoring is Better Than a Loan
When you take out a bank loan, you will have to pay interest. You will pay back the bank by making payments but i you miss one of those payments, it will go on your credit report.
When you sell invoices to a factoring company, nothing goes on your credit report. Yes, they do pay less than the invoices are worth, but the difference between the amount of the invoice and the money the factoring company pays you is the only financial sacrifice you are making.
When you first open your business, it may take a month or two to start getting clients. Those clients will sign a contract with you specifying when the bill for your service is due. Payment will normally be due in 60 days but they are unlikely to pay the bill right away. Factoring offers a short-term solution to what can grow into a big financial problem.
How Does the Process Work
If you are interested in selling your invoices to a factoring company, you will simply contact the company and fill out an application. They will verify basic information about your company and look at the invoices that you want to sell. They will check your client’s credit to make sure that they can pay their bills.
Once your account is approved, you can start selling your invoices to them. A legitimate company will not have a minimum number of invoices. You will get to choose how many invoices you want to sell to them. In most cases, you will be able to get started in just a few hours.
How Soon Will I Get My Money?
It normally takes 3 or 4 days to get your money when you sell an invoice to a factoring company. You can get your money in as little as 24 to 48 hours, but you may have to pay an extra fee. This is faster than any bank loan would ever be.
Different Types of Factoring
There are two different types of factoring; recourse, and non-recourse. A recourse factoring company will expect a trucking company to pay the invoice amount if the client ends up not paying it. A nonrecourse factoring company will take the loss if one of your clients does not pay. It is almost always in your best interest to use a nonrecourse factoring company.
New trucking companies will often do business with small local companies or companies that are new themselves. New companies go out of business all the time.
They may find the expenses that they have to be overwhelming. It is not unusual for them to struggle to pay their bills. The point of factoring should be to lessen your financial burden and not to increase it.
The one benefit of recourse factoring is that it can be a bit easier to get.
What to Look Out For
Some unethical companies will charge hidden fees and look for ways around a nonrecourse agreement. You should never pay a set-up fee or a fee for not selling enough invoices. Some companies will send your invoice back if your clients do not pay within a certain amount of time. They will expect the money they paid you back.
Some companies will keep a certain amount of money in reserve. That means you won’t get paid right away and defeats the purpose of factoring in the first place.
Some trucking companies continue to use factoring services long after they are financially solvent. The reason that they do is that factoring companies take care of a lot of the back-office work.
It costs money to run credit on your clients, but if you use a factoring company, they will run credit checks for you. Once a factoring company buys an invoice, it will take care of sending bills to that particular client.
The factoring company will also collect any delinquent debts for you. You will never have to worry about hiring a third-party collection agency. The company will also advise your clients that you are using a factoring company and that payments should be sent to them.
What to Look for in a Factoring Company
Be sure to look for a factoring company that has been in business for a while and has a good reputation in the trucking industry. It is best if they are partnered with a trucking compliance company. The very best truck factoring companies will offer extra perks, such as a fuel discount card.
A good factoring company should have a customer service team. You should be assigned an account manager who can answer any of your questions.
Trucking is a challenging and rewarding industry to work in. Like any other business, paying your bills can be hard at first, but truck factoring can give you the initial boost you need to be successful for years to come.