A Solution for the Trucking Industry

The current economic downturn has resulted in more than the usual number of headaches for the trucking industry including a shortage of freight, lack of capital, slow paying clients and high diesel prices. The double whammy is the fact these factors are interrelated; if you are unable to secure proper financing and your customers do not pay on time, you are going to experience difficulties paying your day to day operating costs such as fuel, insurance, lease payments and most importantly, your drivers.

As most executives in the truck transport industry are keenly aware, there is a growing shortage of drivers and if you are not able to pay them on time, you won’t be able to keep them. With all of these daily challenges to face, it is not a surprise that many trucking companies are struggling to keep up.

One of the biggest concerns for the trucking industry today is a severe shortage of working capital, commonly referred to as “CASH”. Many trucking companies suffer from chronic cash flow shortages due to the fact that many expenses incurred to earn revenue such as payroll, fuel, insurance and lease payments come due long before the corresponding payments are received 30, 60 or more days after the load is delivered. This problem is compounded by the fact that many trucking companies do not qualify for traditional financing in the form of bank loans or lines or credit. Is there a way to solve this imbalance? Yes there is.

In order to resolve their cash flow woes, many trucking companies turn to factoring. In recent years, factoring has played an ever-increasing role in the transportation industry, often replacing traditional financing methods such as bank loans and lines of credit.

The dictionary describes factoring as the business of purchasing and collecting accounts receivable or of advancing cash on the basis of accounts receivable. In order to better understand this definition, consider the following example:

Sam is the owner of a small but growing trucking company with 12 trucks. Sam’s company hauls freight loads for several large shippers and freight brokers. Although Sam’s company is showing healthy profits, he continually experiences cash flow problems due to the fact that his customers often do not pay him for up to 60 days (or more).

Many trucking company owners face these same problems because a large proportion of their operating costs such as driver pay and fuel costs cannot be paid in 60 days. For various reasons common to many trucking companies, Sam’s bank is only willing to grant him a very small line of credit that is not nearly enough to solve Sam’s cash flow issues. In order to increase the supply of cash to his business, Sam turns to a factor who “purchases” a large portion of Sam’s outstanding accounts receivable, providing immediate cash to Sam’s business.

After evaluating the creditworthiness of the debtors on Sam’s accounts receivable list, the factor decides to purchase a large percentage of Sam’s receivables and immediately provides Sam with a cheque for the full amount, less a small reserve. When Sam’s customers pay their outstanding freight bills, the factor refunds the reserve to Sam, less their discount (interest) fee. The discount fee that the factor applies to Sam’s invoices depends upon several factors including the number of invoices Sam factors on a monthly basis and the length of time Sam’s customers take to pay their invoices. The end result is that Sam has solved his cash flow problem by turning his freight invoices into cash in time to pay out the expenses that he incurred to earn them.

Factoring is not a bank loan. It will have no effect your balance sheet and there is none of the costly administration and reporting costs associated with traditional bank financing. In many cases, financial statements are not required.

Although there are many factoring companies out there, it is important to look for a factor with experience in the truck transport industry. One such company is The Transportation Software Company who has teamed up with Interstate Capital Corporation to provide factoring services to the transportation industry.

Roy Thacker, CEO of the Transportation Software Company said: “Factoring is based on the creditworthiness of your customers, not the financial position and history of your company. For that reason, factors have the flexibility to fund many companies that traditional lenders would not consider such as start-ups, rapid growth situations, and companies that have experienced temporary financial setbacks. When customers submit an invoice to us, we can often turn it into cash in as little as 24 hours”.

Roy Thacker is a Certified Management Accountant with over 20 years experience in the transportation industry. For the last 10 years, he has concentrated on the transportation solutions (software) market and has held senior level positions in sales, marketing, business and product development. His company, The Transportation Software Company is a leading supplier of dispatch software and factoring to the transportation industry.