The health of any business, and in particular small to medium ones, can be made or broken by cash flow. No matter how well the business is doing on paper, when payments don’t come in when needed to keep the wheels turning, the business may be in trouble. This is especially true for the trucking and freight industry, where a lot of small operators with one or two trucks are the backbone. When payment terms are 30 to 60 days, it can become a real problem. This is where truck factoring comes in.
What is truck factoring?
Simply put, truck factoring is when business owners trade their accounts receivable (i.e. invoices for trucking contracts) for an advance of 97% or so of the total amount to a financing company. It is similar to rediscounting, but the charges are much smaller. Truck factoring companies will charge as little as 1%, or as much as 3%, of the total amount as a handling fee, and will undertake the collection of the account receivable.
How does this help with cash flow?
Ideally, a trucking company will have sufficient cash flow that it can wait for its accounts receivable to become due. But if this is not the case, truck factoring ensures that the truck business owner has the funds to keep the business going even if their contracts have 30 to 60 day payment terms. After all, overhead expenses come in daily, and owners can’t afford to keep their trucks idle while they wait for payments to come in to fund daily operations.
Truck factoring is miles ahead of any other type of financial assistance for business owners because the processing time is short and the charges much smaller. Initially, the truck factoring service will advance 90% of the total amount due, keeping the 10% in escrow until a successful collection. The truck owner will then get the remaining money due less the service charges of the truck factoring company. It is the best way to keep the cash flowing in the right direction.