Cash flow is the lifeblood of any business. When cash flow is tight, owners must cut back on expenses and find ways to generate income. Payments terms are often far longer than the average of 40 days and can be as much as 90 days.
For a small business that has already incurred the expenses associated with providing a service, long payment terms or late payments can put pressure on the company’s cash flow and put the company’s viability at risk. For example, a haulage company has a number of costs including:
- Vehicle maintenance
- Road tolls
- Costs associated with running an office space
To keep their trucks on the road most of these costs can’t be postponed. Therefore, it’s easy to see how a profitable business with poor cash flow can quickly run into trouble.
How can you protect your haulage business from poor cash flow?
The following article will outline how a haulage firm can protect its cash flow by using a freight factoring service and how to choose the right company.
Freight factoring – what is it?
A freight factoring company purchases the haulage firm’s invoices and collects payment from the haulage broker. For providing this service, the factoring company will charge a percentage of the invoice value – normally 2.5% to 5%.
Now that the haulage firm is paid quickly by the factoring company, the pressure on its cash flow is relieved. This also frees up your team’s time normally spent on invoicing and credit control so they can focus on growing your business.
Why do I need it?
If you have an established business or are just starting to transport freight, then sooner or later you will need to worry about how to pay your suppliers. If your only strategy is cash flow, then it is easy for late payments to sink the business. Freight factoring can help you solve this problem as it provides you with a way to get paid quickly.
Not only does this take the pressure off of your cash flow, but it also takes part of your accounting processes away. Employing a factoring company is like extending your accounting team. No longer will you need to manage the account receivable, but it also takes care of invoicing, managing billing, and collecting payments.
What to expect when you apply for freight factoring
You will be asked to provide your business details, including the number of staff working for you, and a breakdown of your clients. This will normally include credit checks on both your business and your client’s businesses.
Typically, a freight factoring business will evaluate haulage firms based on:
- Monthly invoice volumes – the more you put through the factoring company the lower the percentage charged.
- Credit risk – if you have completed your due diligence on your clients to ensure that they have good credit scores this will be reflected in the rates you pay and the likelihood of being accepted by a factoring business.
The factoring company will also want details of your client base to ensure that you aren’t overly reliant on any one supplier. Bar a few exceptions, most small factoring services won’t charge you until they have paid out on an invoice. This means you avoid any upfront fees and get to see the benefit of the agreement. Factoring is a simple and straightforward way to push back against cash flow problems without having to make any significant changes to your business. It can solve an immediate problem and grow with your business as your client base increases over time.
What else should you consider?
So far it appears that the factoring company is taking all of the financial risks associated with late or non-payment. However, that isn’t really the case. Most factoring companies will have recourse or non-recourse clauses in their contracts.
Recourse vs non-recourse factoring
In the event of late or non-payment, the factoring company will invoke its recourse clause. This basically means they will expect you, as the issuer of the invoice, to make payment until the invoice is cleared or payment is received from the broker. This can leave you having to pursue the broker for payment. You are ultimately responsible for any payment issues.
If your contract includes a non-recourse clause you are protected against the broker declaring bankruptcy during the window of the invoice date and payment due date.
To minimize the risk of working with late payers or companies with poor credit scores some freight factoring companies employ their own credit control teams. By reviewing the business histories and credit scores of potential clients, they can mitigate the risk of late payment or non-payment. This is one reason why choosing a factoring business with a large credit control department will lead to lower fees and better service.
You can reduce the fees paid to the factoring company
As previously noted, the fee range is roughly 2.5% to 5%. It is possible to negotiate a reduced fee by agreeing to a reduced advance payment amount. For example, if you agree that the factoring business releases 75 – 85% of the invoice value the risk the factoring company faces is reduced, which in turn can help you to negotiate a better rate.
Finding a freight factoring service will help you solve your cash flow problems, but it also opens the door to experiencing other benefits. The process of getting paid quickly allows you to focus on growing your business and allows you to let go of parts of your accounting processes. In addition, the process of getting paid can help with client retention and means that there is no risk of losing contract details. You can get back to focusing on growing your business and ensuring that it is doing well.
Factoring is a simple solution for handling cash flow problems. Factoring the right way can be done with a simple online application process for some factoring companies and this saves time in processing invoices which will allow more time for growth in your business.