Cash flow is a significant determinant of whether a business flourishes or dies, and your transportation business isn’t an exception to this. When you have consistent cash flow, you’re able to meet the running costs of your business. And one of the ways to fund your business is by collecting invoices from your customers.
However, this may not always work in your favor because of invoice periods that range between 30 and 90 days and due to slow-paying customers. The income gaps occasioned by the unpaid invoices can cause substantial financial problems that can affect the efficiency of your business. To cover these gaps, you can go for invoice factoring, which can help boost your cash flow instead of waiting for your clients to pay.
What Is Transportation Invoice Factoring?
Transportation invoice factoring is a process where a transportation business sells accounts receivables to a transportation invoice factoring company for cash. Factoring companies will commonly pay about 90% of the invoice value upfront. After the factoring company collects the invoices for your client, you get the remaining money, also called a rebate, less the factoring fee.
The fee and upfront payment differ from one company to another, and it’s something you need to keep in mind when considering transportation factoring. Approvals are quick, especially when your clients are creditworthy. But this alternative means of financing has both pros and cons, as you’ll see below.
Pros Of Transportation Invoice Factoring
Invoice factoring has many benefits to businesses in the transportation industry because it deals with some of the slowest-paying accounts receivables. This results from fees in logistics services being paid by several contractors involved in the shipping cycle. Here are the main benefits.
- It Provides A Resolution For Cash Flow Issues
Among the most significant benefits of invoice factoring is the resolution of cash flow issues in the business. Regardless of the reasons you’re encountering cash flow problems, selling your invoices would allow you to meet your financial obligations without digging into your savings. With an increase in cash flow, you’d get opportunities to grow your business.
Any business opportunity that may arise would become easier to take on, ultimately giving you a chance to generate more money. This can help keep your business from new or bad debts or prevent it from closing down altogether.
- You Get Fast Money
The kind of financial needs in a transportation business often can’t wait. Issues like repair, maintenance, inspection, and fuel aren’t necessities you can postpone until a bank loan is approved. Besides, they’re recurring and require that you have cash at hand to deal with them. With invoice factoring, funds are disbursed fast, sometimes within 24 hours of applying.
In addition, factoring companies only require a few supporting documents to approve your application. This ensures your fleet is in its best condition and moving without disruptions.
- Credit Isn’t A Huge Factor
While lenders such as banks are more concerned about your credit, invoice factoring focuses more on your customers’ creditworthiness. If you have bad credit and still want to factor in your invoices, you can still do so.
Even if you’re just a startup and yet to build credit, it shouldn’t stop you from invoice factoring. This makes factoring attractive and convenient to transportation businesses of all sizes.
- There’s No Debt Incurred
Transportation factoring isn’t a business loan. You’re simply selling off a business asset, which is your accounts receivables. Although you’ll sell at a discounted price agreed upon with the factoring company and pay their collection fees, there’s no long-term liability involved. This is one of the significant differences between invoice factoring and getting a business loan.
Besides, you also won’t be required to give any collateral in the form of business equity, equipment, or other assets. You simply give out your unpaid invoices and receive cash in return.
- Credit Checks Can Be Done On Potential Customers
Some factoring companies have mobile apps and online portals to check a customer’s track record before taking a load. This keeps you from taking customers who have trouble paying. They offer a service free, eliminating the worry of working with customers who won’t pay.
- You Get To Enjoy Discount Benefits
Some transportation factoring companies offer more than invoice factoring services. They also have fuel discount programs that can help you save considerable amounts. They work with fuel pumps to offer discount cards, allowing you to save money each time your vehicles fuel. Apart from fuel discounts, others may provide tire discounts, fuel advances, and similar promotions.
Cons Of Transportation Invoice Factoring
Although transportation invoice factoring remains largely beneficial to businesses, it also has some drawbacks. Here are some you should keep in mind.
- It Comes At A Cost
The service is not simply exchanging your invoices for money. You need to pay for it. A factoring company eliminates the process of you having to follow up on your debtors, and there’s the uncertainty of when they’d receive the money. This is why you need to pay a fee for convenience. However, the rates charged are relatively higher than what a conventional credit line would charge you.
- Bad Customers May Cost You
You may need to buy back your invoices if your customers fail to pay. However, if your arrangement with the factoring company is nonrecourse, you may be protected. This type of factoring would cost you more as the company accepts your customers’ credit risks.
- You Have No Say On Approval
You’re wholly dependent on your customers’ creditworthiness. Also, the decision by the factoring company to approve your application and the rate you get all depend on the credit rating of your customers. This is something you have no control over.
- You Could Deal With A Wrong Factoring Company
There’s a risk of factoring your invoices with the wrong factoring company. If this happens, you can face months of waiting or be a victim of bogus terms and conditions. Always ensure you deal with reputable companies, therefore.
Transportation industry factoring is among the best alternative cash flow solutions for transport industry businesses. It’s also an excellent method of handling slow payers while keeping your business afloat. With the right transport invoice factoring company, you pay for your business’s running expenses and take new jobs. But don’t forget to consider the drawbacks when assessing whether it’s a good option for your transport business or not.