In the midst of the credit crunch, companies in many different industries are discovering the potential benefits of factoring their accounts receivable. There's at least one industry, however, for which factoring isn't necessarily breaking news: trucking. Trucking companies have been taking advantage of the benefits of factoring services for years.
The biggest challenge facing new and growing trucking companies has always been managing cash flow. How do you make sure that the money coming in matches the money going out? For the owners of most trucking companies, this is their biggest challenge.
Factoring Services: A Reliable Alternative
Most business owners rely on bank lines of credit to provide them with the cash they need until they actually get paid. This can create a dangerous situation, however, as lines of credit are more difficult to come by today. Many companies that do have credit lines are seeing them cancelled or reduced by banks with little or no explanation or warning.
While banks can provide trucking companies with lines of credit, the companies have to establish a history of profitability. Also, the bank will look at the company's profits as the first source of repayment, then to the equity or net worth of the business, and then to liquidation of the owner's assets, particularly real estate.
Many trucking companies have discovered that factoring is a reliable and effective alternative to bank lines of credit for financing their working capital shortfalls. In fact, many "bankable" trucking companies are choosing factoring services even if they qualify for bank credit lines.
Factoring services are common in the trucking industry because qualification depends mostly on the trucking company's customers. A factor will conduct thorough credit checks on all the main customers and follow up until invoices are paid. This is a valuable service that prevents collection problems and bad debt for trucking companies. In fact, some owners feel that this service alone justifies the cost of factoring services.
The factoring process is simple: A commercial finance company, or "factor," purchases invoices from the trucking company as soon as there is an attached Bill of Lading. This way, the company always has enough cash to pay its bills on time or even early, which enables owners to negotiate "early pay discounts" to help offset the factoring service fees. Just as importantly, the owner can focus on more important business issues like sales and profitability, instead of collecting accounts receivable.
Handing Off Collections
The president of a trucking company in New Brunswick has been factoring accounts receivable since 2007. "Our commercial finance company handles the day to day work of collecting our receivables," he says. "They do all the work and the only time we hear from them is when there is a problem. We like that."
Before new customers are added, the commercial finance company first checks their credit. "This has helped us avoid potential problem accounts on several occasions," the president says. "The best part is that we can now control our own cash flow. We decide when to submit our invoices and the commercial finance company turns them into cash; that's a lot better than waiting for our customers to pay us."
Utilizing factoring services has helped this trucking company grow tremendously despite the rough economy. "By utilizing factoring services, we have been able to triple our growth in the last 24 months and still maintain positive cash flow."
Tom Klausen is the Senior Vice President of First Vancouver Finance (FVF), which has offices in Vancouver, BC and Toronto, ON. FVF provides creative financing solutions to small and medium-sized businesses across Canada. Tom has worked in the alternative lending industry for more than 25 years and consults with businesses struggling to obtain traditional financing.
