How to Finance a Growing Transportation Carrier
Now that the recession is over and the economy is growing again, transportation companies are finally seeing some growth themselves. However, conditions are more difficult than they were before and mo...
Now that the recession is over and the economy is growing again, transportation companies are finally seeing some growth themselves. However, conditions are more difficult than they were before and most shippers are paying their freight bills slowly. Invoices that used to pay in 15 to 30 days are taking 45 to 60 days to pay. This creates a cash flow problems because few carriers have the resources to pay their operating expenses while waiting 45 to 60 days to get paid. If managed incorrectly, this situation can lead to three possible outcomes: the carrier stops growing, the carrier gets into trouble with operational costs, or in the worst case scenario, the carrier goes out of business.
If you don't want to get business financing, your only two options are to either restrict growth or to convince shippers to pay sooner. Actually, it's not unusual for some shippers to offer a quick payment option if you give them an incentive discount, such as 2% off if they pay in 10 days or less. This strategy can work well but it will leave you at the mercy of your shippers. Your company could run into problems again if they decide to stop taking the early payment discount.
Another alternative is to address the cash flow problem directly using freight bill factoring. This financial product provides the equivalent of a quick pay by using an intermediary company called a factoring company, which provides a quick payment for your freight bill and holds it until your shipper pays. Using freight factoring can improve your cash flow substantially by reducing the amount of time you wait to get paid for your freight bills.
Most freight factoring transactions are done in two installments. Your first installment of 90% of the invoice is provided to you as soon as you send the invoice to the factoring company. The remaining 10%, less a service fee, is paid as a second installment once the invoice is paid in full.
One feature that makes factoring an attractive option is that it's easier to obtain than most conventional business financing products. The most important requirement is that your shippers must have a good commercial credit rating, since factoring companies advance funds based on your shippers ability to pay. Since solid invoices from good shippers are the factoring company's preferred collateral, small and growing companies that have good clients can usually qualify for this solution.
Freight factoring can be an ideal solution for transportation carriers whose main issue is that they can't afford to wait for their clients to pay because they need the funds sooner.
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