According to the American Trucking Association, there are more than 500,000 trucking companies in the United States and 80 percent of them have fewer than twenty trucks. While there are many national logistics organizations, the vast majority of these can be classified as a small business.
If you are in trucking or if you run a professional business in the field of shipping and logistics you are probably acutely aware of the disparity between when you complete the work versus the length of time it takes for your customers to process payment. It does not matter if you are a broker or an independent driver or a large logistics organization, the gap between when you do the work and when you get paid for the work can lead to several financial problems and business cash flow issues.
While it is commonplace to extend thirty, sixty or even ninety days credit to longterm or volume customers, the extended payment period can create some significant problems. After all, as a business you have bills to pay as well, and those bills happen every thirty days without extended payment options. It may not be fair but it is the nature of the transportation industry. But you can improve your cash flow and get access to your money sooner with an accounting practice known as “factoring.”
Is Invoice Factoring a Loan?
Many people confuse invoice or receivable factoring to be a loan. It is not. To qualify for a loan from a major financial institution you must meet a number of different criteria, including providing evidence of collateral and a good credit history. If you are a freelance professional or a small business owner and fully self-employed, the chances of you qualifying for an unsecured loan are low. In the current economic climate most banks are simply unwilling to extend credit, particularly to entrepreneurs without significant collateral.
Receivable invoice factoring is not a loan but rather a convenience fee that is paid to an agency who is willing to advance you the value of your customer accounts receivable invoices. They are not lending you money; they are simply allowing you to withdraw amounts immediately from the value of the invoices that you know will be processed in the next one to three months. It is a great way to unlock additional liquidity for your business and resolve the imbalance in sales and cash flow.
When a business uses the services of a receivable factoring agency, it is literally like getting paid immediately by the customer. It becomes the agency’s job to collect the amount from your customer, and many businesses have used receivable factoring services as a way to encourage late paying customers to adopt a more timely approach. The business is able to retain a positive relationship with its customer as the factoring agency is the one that contacts the client if the invoice is late. While the business can expect to pay from 2 percent to 3 percent every month for the service, it can be a useful and effective alternative.
The Benefits for Transportation Organizations
Individuals in the logistics business can attest to some of the slowest paying accounts receivables in any industry. The reason is that logistics services and fees are often paid by a number of contractors depending on the duration of shipping for the product. One person must be paid before the next person can be paid for their invoice. The multiple levels that are inherent with the way logistics and shipping companies do business lead to extended payment deadlines. You’ve earned it but you can’t get your hands on that income just yet. And it doesn’t matter whether your own business needs it or not, there have traditionally been very few options to expedite fast payment without alienating existing customers and hampering sales.
There are a number of benefits to using a receivable factoring agency. There is a lot of competition and there are many businesses looking to accept proposals on your accounts receivables. These agencies will provide varied fees for doing the same thing, which is good for you because the competition helps to keep the percentage cost of borrowing lower. And since there are so many businesses vying for your receivables you can take some time and choose one that you enjoy working with and one that gives you great service for a low fee.
Bank loans can be difficult to acquire. The popular micro-loan is typically difficult to get for most small and medium sized businesses in the current economic climate. Using a receivable factoring agency can be a viable and convenient solution for transportation and logistics organizations.
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