The trucking industry, which includes owner-operators, fleet owners, and freight brokerages, is the backbone of the domestic supply chain, typically accounting for over half of the total domestic freight volume. While trucking services are essential, many of these businesses currently face significant challenges because of the prolonged freight recession. However, even in a strong freight economy, trucking companies still face substantial cash flow challenges caused by extended payment terms, fluctuating fuel costs, and ongoing operating expenses. For small owner-operators, and mid-to-large-sized fleet owners, delayed payments can make it difficult to cover fuel, maintenance, payroll, and other essential expenses.
A highly effective and tailored solution to these challenges is accounts receivable (AR) factoring. Factoring helps trucking companies of all sizes improve cash flow by providing immediate payment for outstanding invoices. In this article, we’ll explore the cash flow challenges specific to the trucking industry, how AR factoring works, and why it’s a valuable tool for trucking companies.
Cash Flow Challenges in the Trucking Industry
Long Payment Terms
Many trucking companies, especially owner-operators and small fleet owners, collaborate with freight brokers to locate freight for hauling. These brokers work with shippers to find carriers to haul their goods. Shippers often won’t pay the broker for 30, 60 or even 90 days. The broker typically passes this delay on to the carrier, which is why carriers must often wait 30 to 45 days to receive payment for loads delivered.
The carrier can’t always solve the problem by cutting out the broker as a middleman, since the carrier then waits on the shipper directly. Either way, this creates a cash flow gap for trucking companies that makes it difficult to manage day-to-day expenses, such as fuel, repairs, and payroll.
High Operating Costs
Trucking is a capital-intensive industry with high operating costs. Not only must carriers purchase a truck, but also manage ongoing expenses such as fuel, maintenance, insurance, and tolls. And these are just the costs associated with the owner operator business model. Fleet owners must also manage payroll for drivers, which is typically due weekly or monthly—far sooner than customer payments arrive.
Unpredictable Expenses & Seasonal Fluctuations
The trucking industry is cyclical, experiencing periodic upturns and downturns. Some of these peaks and valleys are seasonal, resulting from holiday shipping. Liquidity is critical during peak seasons, as there are more expenses associated with the greater volume, and during slow seasons, where many carriers may find themselves strapped for cash.
Many carriers must also absorb unexpected costs, including vehicle breakdowns, fluctuating fuel prices, and rising insurance premiums. These unpredictable expenses can further strain cash flow, especially when there are delays in customer payments.
Fuel Costs
For owner-operators and fleet owners, fuel is one of the largest and most unpredictable expenses. Rising fuel prices can quickly deplete working capital, making it difficult for trucking companies to maintain steady operations while waiting for payment from brokers or shippers.
How Accounts Receivable Factoring Works
Accounts receivable factoring (also referred to as freight factoring) offers trucking companies a way to turn unpaid invoices into immediate cash. Instead of waiting for clients (such as brokers or shippers) to pay, carriers can sell their invoices to a factoring company and receive a cash advance based on the invoice value.
Here’s how factoring works in the trucking industry:
- The trucking company delivers freight and either issues an invoice to the client (shipper or broker) or submits the BOL and other load documentation directly to the factor, who invoices the shipper or broker.
- Instead of waiting 30 to 90 days for the client to pay, the trucking company sells the invoice to a factoring company.
- The factoring company advances a percentage of the invoice value—typically around 95%—to the trucking company.
- The factoring company then handles the collections process, ensuring that the broker or shipper pays on time.
For example, if a fleet owner submits a $1,000 invoice to a factoring company, the factoring company might advance $950 immediately, keeping back their fees, and potentially a small cash reserve to hedge against losses from bad debt.
Benefits of AR Factoring for Trucking Companies
Immediate Cash Flow
The most significant benefit of factoring is that it provides trucking companies with immediate cash. Instead of waiting weeks or months to receive payment from brokers or shippers, carriers can access the majority of their invoice value within days. This cash can cover fuel, repairs, payroll, and other operating expenses.
No Additional Debt
Factoring is not a loan—it’s the sale of a financial asset (the invoice or accounts receivable). This means that trucking companies can improve cash flow without taking on additional debt or incurring interest payments. For owner-operators and small fleet owners, this is especially valuable because it preserves financial flexibility. Additionally, factoring does not depend on the carrier’s credit, rather on the credit of the broker or shipper to pay the invoice.
Fuel and Maintenance Payments
With cash readily available through factoring, trucking companies can keep their trucks on the road by covering critical costs like fuel and maintenance. Some factoring companies can even fund immediately to a fuel card, so carriers can easily leverage fuel discounts. This ensures smooth operations and prevents disruptions caused by cash flow shortages.
Scalability
Factoring grows with your business. As trucking companies generate more invoices through increased loads or expanded operations, they can access more capital through factoring. This makes factoring a highly flexible solution that can help a carrier bridge the gap between being an owner-operator and fleet owner.
Credit Risk Management
Many factoring companies provide credit-checking services so that a carrier can check broker or shipper credit before hauling a load. This helps trucking companies assess the creditworthiness of potential customers before extending services, reducing the risk of non-payment or bad debts.
Outsourced Collections
Factoring companies often handle collections (up to a point), taking some of the burden of chasing down payments off the trucking company. This is particularly helpful for smaller owner-operators who may not have the time or resources to follow up on unpaid invoices.
Benefits for Specific Types of Trucking Businesses
Owner-Operators
For owner-operators, cash flow is often tight because of narrow profit margins and fluctuating fuel costs. Factoring provides immediate working capital, allowing owner-operators to cover expenses like fuel and repairs while they wait for clients to pay. This steady cash flow ensures they can keep their truck on the road without interruptions.
Fleet Owners
Fleet owners, managing multiple trucks and drivers, face significant payroll and operational expenses. Factoring enables them to meet payroll, cover fuel costs for the entire fleet, and maintain or expand operations.
Freight Brokerages
As explained above, freight brokerages often act as intermediaries, managing payments between shippers and carriers. But freight brokers can leverage factoring as well. When shippers take longer to pay, brokerages can use factoring to advance payments to carriers on time, maintaining good relationships with their network of carriers.
Other Cash Flow Solutions for Trucking Companies
While accounts receivable factoring is an effective solution for many trucking companies, there are other strategies that can also help improve cash flow.
Fuel Cards
Many trucking companies use fuel cards, which provide discounts on fuel purchases. Some fuel cards require the carrier to load cash onto them, but if a carrier is reputable, the fuel card provider may extend credit, allowing drivers to buy fuel without depleting company cash reserves. Additionally, some fuel cards offer discounts for maintenance purchases, such as new tires, increasing the savings.
Quick Pay Options
Some load boards and freight brokerages offer “quick pay” options, allowing carriers to get paid faster for loads. While these programs often come with a small fee, they can provide quicker access to cash without the need for factoring.
Bank Lines of Credit
A traditional line of credit from a bank can provide a cushion for trucking companies needing short-term cash flow. However, this option requires good credit and often involves interest payments and strict repayment terms, making factoring a more attractive option for many trucking businesses.
Expense Management
Carefully managing expenses, especially fuel, maintenance, and payroll, can help trucking companies maximize cash flow. Utilizing fleet management software, negotiating fuel contracts, and maintaining fuel-efficient driving practices can also reduce costs and improve profitability.
Building a Cash Reserve
Building up an internal cash reserve is often the most cost-effective way to maintain liquidity. However, in today’s economy, not all trucking companies can afford to keep cash in reserve.
Conclusion
Trucking companies—including owner-operators and fleet owners—face significant cash flow challenges because of delayed payments, high operating costs, and market fluctuations. Accounts receivable factoring provides an effective solution by offering immediate access to cash tied up in unpaid invoices, allowing trucking businesses to cover fuel, payroll, maintenance, and other expenses without waiting for customer payments.
Factoring is especially valuable because it doesn’t involve taking on debt, is flexible, and grows with your business. While AR factoring is an ideal cash flow solution for many trucking companies, other options, such as fuel cards and strict expense management, should also be considered to optimize financial stability. By using some or a combination of these strategies, trucking companies can better maintain a steady cash flow and keep their operations running smoothly.
