You suddenly find that your business is in a cash squeeze. You started your small trucking company with five units and a lot of industry experience. Things started out well, with revenues per mile on an upward trend, and an addition of two units the first year. But the expense pressure of higher fuel costs, driver settlements, permits, insurance, and repairs have begun taking its toll. Add to the mix some uncollectable accounts and your margins begin to suffer.
Tightening cash flow even further is the credit you are extending to your customers. Take a look at your accounts receivable aging schedule and you’ll likely see many accounts over 30 days. You are not getting paid for delivering your end of the deal in a timely manner and as a result, you are providing the use of your money to your customer for free. Unfortunately, you can’t defer payroll, fuel, and other expenses for thirty or more days.
Should you adopt a COD payment policy? How about adding a service charge to all accounts over 30 days and vehemently sticking to it? Neither of these solutions is advisable, because you will probably lose customers right and left. You are in a highly competitive industry and other companies would jump at the chance to acquire new customers by offering them the credit that you won’t.
There is a service that can provide a safety net for your company and allows you to convert freight bills into instant cash flow within 24 hours. Better yet, this service only costs pennies on the dollar. This service is called invoice factoring.
Although not widely known among entrepreneurs, factoring has been a useful financing tool for centuries. Manufacturers, distributors, service providers (such as trucking companies) use factoring to stabilize their cash flow. In 2005, factoring volume exceeded $112 billion, and has grown every year since 1984.
Factoring is the purchase of a company’s accounts receivable at a discount. The process is simple:
• Fill out a simple application and include an receivables aging report
• Factoring company reviews the application and determines credit worthiness of the client’s customers
• Letter of intent is given to the client, outlining the proposed advance rate (typically 80%-90% of the invoice), and fee structure (usually from 2%-3% per month depending on several factors)
• Upon acceptance of the terms, a formal contract is executed
• Initial funding can occur within 3-5 days
BENEFITS OF FACTORING
• Professional collections – Not only will a good factor collect receivables
in a professional manner, but he will eliminate overhead associated with
the collection process which free up your time to run your business.
• Compliance – a factor that specializes in trucking can provide tools that greatly diminishes the time needed for complying with what seems like an endless list of government rules and regulations
• Fuel Card – accepted wherever Fleet One cards are accepted. The factoring facility can be “loaded” on the card and ATM access and the ability to write checks are definite advantages
• Unlimited capital – Factoring is the only source of financing that grows
with your sales. As sales increase, more cash becomes available for you
to use, which allows you to constantly meet demand
• Take advantage of volume and early payment discounts – With
improved cash flow, you will be in a position to take advantage of these
discounts which directly effects your bottom line
• No debt incurred – Factoring is NOT a loan and therefore, you are not
incurring any debt. This keeps your balance sheet looking good, thereby
making it easier to obtain other types of financing or to sell the
company
• Choose the invoices you wish to factor
• Factoring is quick and easy – Unlike applying for a loan, there are no extensive documentation requirements and funding can occur in days, not weeks
• Credit Screening – Professional factors can provide credit investigations for new and existing customers, which will likely lower your bad debt charge-offs
• No personal guarantees – The company principals do not have to guarantee the repayment of the funding (only against fraud or disputes)
Imagine a scenario where you have the time to devote to developing new business and running your operation more efficiently, rather than worrying how you’re going to pay your bills on time. Factoring can give you that flexibility
Kent Harlan has been a CPA since 1984 and has provided consulting, accounting and financial services to several industries. He is the owner of Ozarks Capital Funding, LLC, a Springfield, MO based company offering financing for businesses and healthcare providers.
Does your transportation need working capital? Click here to see how Ozarks Capital Funding can be your solution.
Contact information:
Web: http://www.ocflink.com
Email: kenth@ocflink.com
Phone: (417) 849-7394