TORONTO, Ont. – Generating consistent cash flow is one of the greatest challenges facing small fleets or start-ups, which has given rise to the prominence of invoice factoring.
With margins in the trucking industry so thin, the idea of selling invoices to a third-party at less than face value for immediate cash is unpalatable to some. However, for fleets looking to finance new equipment or even put diesel in the tanks while waiting on slow payers, the service can be a lifeline.
Ian Mitchell, business development manager with Riviera Finance sees a mix of customers; some short-term and others long-term, some in financial duress and others growing their business to the next level.
Small trucking firms who haul freight for the big box retailers are among the most frequent customers, Mitchell notes: “Small trucking companies that may be shipping for bigger companies, like Target or Walmart. They have their processes as far as issuing payment, and that creates a lag. It might be 45-50 days before they issue payment and that’s where small to medium-sized trucking companies welcome us in the door, because they’re getting their money right off the bat as opposed to waiting those 50 days.”
Some groundwork must be done before a carrier can expect to receive payment for its invoices within a 24-hour window. The carrier’s debtors must first be approved and verified by the factoring company and this can take weeks for a first-time client.
Once the process has been set up, it’s easier with future transactions, Mitchell explains. In many cases, carriers can receive payment within 24 hours of submitting an invoice.
Trucking companies looking to pursue this option should be aware there are two different types of invoice factoring: recourse and non-recourse. Providers of recourse factoring can charge back the invoice to the trucking company if it goes unpaid.
Non-recourse factoring providers take on the risk themselves and as such, generally charge a higher rate.
“One thing to be wary of, is a lot of times those recourse companies will offer lower rates,” Mitchell warns. “But just be mindful of that, because if you’re a start-up company and one company doesn’t pay you, you could be stuck holding a bill for $3,000 and that can be critical as far as moving forward with your business.”
Non-recourse factoring companies may be more selective about the invoices they accept.
“We like the ones that are quick payers, but sometimes it doesn’t make sense for the trucking company to factor that invoice,” Mitchell says. “But, it’s not necessarily the ones who take forever (to pay); we do have limitations. We like to look at invoices between 30-60 days. We’ll look at some that are 90, but don’t want to look at much beyond that, otherwise it’s a risk for us.”
Mitchell admits that some trucking companies that turn to invoice factoring are desperate, but adds others are just looking to free up cash to buy trucks and build their businesses. Often, he says, factoring companies must say a bittersweet goodbye to customers who’ve become so successful, they no longer require an invoice factoring service.
“It’s a little bittersweet, when we hear from a customer who we’ve helped grow their business, maybe helped somebody through a rough patch or helped them get off the ground and they get to a point where they don’t need us anymore,” Mitchell says. “It’s really nice to hear that story.”
The rates charged by factoring companies vary, depending on volume and other variables. When shopping around, Mitchell suggests asking the provider if there are any administrative or other charges in addition to the base rate.
Asked if trucking companies’ customers get annoyed when contacted by a third party looking for payment, Mitchell said there’s usually the opposite effect, because invoice factoring providers have standardized payment processes in place that are easy to use and in some cases, actually reduce payment cycle times.
Certainly, hanging on to every cent you charge your customer for services provided is the best case scenario, but there are times when fast cash is needed. When choosing an invoice factoring company, shop around, compare rates but also ask what’s included in the rate – and just as importantly, what’s not.