by Tracy Eden
In the midst of the credit crunch, companies in many different industries are discovering the potential benefits of factoring their accounts receivable. There’s at least one industry, however, for which factoring isn’t necessarily breaking news: trucking. Trucking companies have been taking advantage of the benefits of factoring for years.
The biggest challenge facing new and growing trucking companies has always been managing cash flow. How do you make sure that the money coming in matches the money going out? For the owners of most trucking companies, this is their biggest challenge.
An Alternative to Bank Credit Lines
Most business owners rely on bank lines of credit to provide them with the cash they need until they actually get paid. This can create a dangerous situation, however, as lines of credit are more difficult to come by today. Many companies that do have credit lines are seeing them cancelled or reduced by banks with little or no explanation or warning.
Many trucking companies have discovered that factoring is a reliable and effective alternative to bank lines of credit for financing their working capital shortfalls. In fact, many “bankable” trucking companies are choosing to factor even if they qualify for bank credit lines.
Factoring is common in the trucking industry because qualification depends mostly on the trucking company’s customers. A factor will conduct thorough credit checks on all the main customers and follow up until invoices are paid. This is a valuable service that prevents collection problems and bad debt for trucking companies. In fact, some owners feel that this service alone justifies the cost of factoring.
The factoring process is simple: A commercial finance company, or “factor”, purchases invoices from the trucking company as soon as there is an attached Bill of Lading. This way, the company always has enough cash to pay its bills on time or even early, which enables owners to negotiate “early pay discounts” to help offset the factoring fees. Just as importantly, the owner can focus on more important business issues like sales and profitability, instead of collecting receivables.
Raj Singh, a Business Development Officer with First Vancouver Finance, has been financing trucking companies through factoring for several years now. She has seen newer trucking companies grow and troubled companies turn themselves around through factoring.
“If the business owner can produce good paperwork, has stayed up-to-date on their taxes and has kept their customers happy, then they are a good candidate for this type of financing,” she says. “We love to factor trucking companies just as much as trucking companies love to factor with us.”
A Smooth Relationship
For many companies, factoring is a temporary financing solution that lasts from 12 to 18 months until their balance sheets improve to the point that they can qualify for a bank loan or line of credit. However, some industries use factoring on a more permanent basis, including apparel and carpet manufacturers and furniture manufacturers and distributors
“Undercapitalized” Small Business?
Chris Pryor, the President of a trucking company in New Brunswick, has been factoring receivables with FVF since 2007. “Our relationship runs very smoothly, with FVF handling the day to day work of collecting our receivables,” he says. “They do all the work and the only time we hear from them is when there is a problem; we like that.”
Before Chris adds new customers, FVF first checks their credit. “This has helped us avoid potential problem accounts on several occasions,” says Pryor. “The best part of working with FVF is that we can now control our own cash flow. We decide when to submit our invoices and FVF turns them into cash; that’s a lot better than waiting for our customers to pay us.”
First Vancouver Finance Managing Partner David Tubbs specializes in providing factoring services to the trucking industry. “A bank can provide a trucking company with a line of credit, but it’s more of a fair-weather lender. The company has to establish a history of profitability, and the bank will look at the company’s profits as the first source of repayment, then to the equity or net worth of the business, and then to liquidation of the owner’s assets, particularly real estate.”
Chris Pryor says factoring invoices through FVF has helped his company grow tremendously despite the rough economy. “By utilizing the services that FVF provides, we have been able to triple our growth in the last 24 months and still maintain positive cash flow.”
To learn more about the benefits of factoring to the trucking industry, please contact Raj Singh at (604) 341-3764 or RSingh@fvf.ca or visit www.FVF.ca.