They say that the trucking industry is one of the first predictors of a recession as well as one of the first predictors of economic recovery. When shipping starts to decline that means people aren’t buying. When shipping via trucks picks up steadily, then we are on the right track. Frankly, no matter what the stock market, housing starts and unemployment trends show, the trucking industry indicates that we’re in a recession and are likely to remain in this state for quite a while. That’s why freight bill factoring has become an almost essential practice for truckers.
It is a plain fact that many in the trucking industry are trying to simply survive until things turn around. And the members of the trucking industry have varied profiles. There are large national and regional carriers who are cutting expenses by letting drivers go, small to medium local and regional trucking firms who are following the same course of action and independent truckers with fixed expenses and no revenue if they are not on the road.
Each of these types of trucking entities is implementing specific measures to remain solvent until the economic storm passes. Some, unfortunately, will not make it. But one method many truckers use to keep their cash flow moving and their financial heads above water is freight bill factoring.
Factoring freight bills is a practice that is certainly not new to the trucking industry. I used to work in sales for a small trucking firm and the company could not have operated were it not for the practice of factoring their invoices. Factoring is, essentially, an agreement between a company and a “factor” whereby the factoring agent provides the company with cash advances in exchange for the company’s invoices or receivables. Depending on a variety of conditions, the factoring agent will advance to the company anywhere from 70 - 90% of the value of the invoices. Once the invoices are collected, the company receives the balance of the cash due less a small percentage that the factor is compensated for advancing the cash against the invoices. This rate is typically between 1-3%.
As any trucker will tell you, waiting to get paid by clients can be terribly frustrating. The customer wants the best possible terms for providing their freight business to the trucker and the trucking firm can wait anywhere from 30-90 days to get paid. In the meantime, there are drivers to be paid, trucks to be maintained, fuel to be purchased, etc. And those expenses must be paid right away. A driver is not going to wait up to 90 days waiting for the company to get paid so the company has to either have a large surplus of cash (which is not likely in a trucking enterprise) or access to a line of credit against which they can draw. And we all know what it’s like to get credit these days.
The fact is, the trucker does have an asset in the form of the receivables outstanding through the issued invoices. Eventually, they will get that money and the factoring agent knows that. Consequently, they are willing to “buy” these invoices at a discount from the trucking company and provide most of the cash value right away. This arrangement puts much-needed cash in the hands of the trucker and a few percentage points of the total value in the pocket of the factoring agent or company.
In the current economic climate, factoring is becoming more widespread as a form of financing. Factoring has been widely used by the trucking industry, healthcare and construction industries for quite some time. However, as credit becomes tighter and payment is even slower in coming, many companies are turning to factoring as a means of staying solvent and, in some cases, growing their business.
As I said, the trucking industry tends to be a leading indicator of economic trends. The use of freight bill factoring has made the industry has into one of the leading proponents of factoring receivables as a form of financing. Let’s hope both the trucking and factoring industries are trending in a positive direction for the foreseeable future.
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