Last Updated on June 24, 2021
Cash flow is the beating heart of every business. When cash flow is poor, your entire business suffers the consequences. As a small business owner (perhaps even a new small business owner), the threat of poor cash flow can undermine every financial decision you make on behalf of your business.
If you’re scraping the bottom of the barrel, invoice factoring may be a fruitful option. Invoice factoring is an option for businesses in various industries, but it’s particularly useful for truckers, who sometimes can’t wait the full duration of their payment terms before they need cash.
Invoice Factoring: A Cash Flow Solution?
Invoice factoring—sometimes known as invoice discounting or accounts receivable financing—is a process by which you sell your invoices to a factoring company that pays you in cash right away (while deducting a fee, of course). The purpose of invoice factoring is to provide small business owners with fast cash so that they don’t have to wait the entire duration of their payment term to be paid for their services.
There are a variety of industries that experience lower-than-average access to traditional financing methods, and trucking is one of them. You may not be able to afford or be approved for a traditional line of credit if:
- Your business is new
- Your business doesn’t have a long-established credit history
- Your business has suffered from cash flow issues in the past, impacting your record of paying bills on time
- Interest rates are too high
Luckily, alternative financing methods like invoice factoring are available to small business owners who find themselves in any of the above circumstances. But, like every other lending option, invoice factoring comes at a price.
Factors that determine trucking factoring rates
There are a variety of factors that influence trucking factoring rates. Some are within the business owner’s control, while others ebb and flow at the behest of the market.
Length of time in business
Unfortunately, if you established your business recently, you’re likely to pay a higher fee than a long-standing trucking company. However, lenders can’t afford to take a chance on a new company that doesn’t have an established credit history. Just like you’re unlikely to be approved for a high credit limit at a young age, your new business is unlikely to pay low invoice factoring fees.
Total monthly revenue
If your company has a high volume of receivables but low cash flow, an invoice factoring company will have more faith in your ability to stay in business for the entire duration of your contract. Longevity is certainly indicative of creditworthiness, and lenders are quick to recognize companies in it for the long haul (for lack of a better phrase).
Length of time it takes your customers to pay
If your clients have a history of racking up past due bills or waiting until the absolute last day of their payment term to pay, your company will likely experience a higher factoring rate.
Unfortunately, this is a vicious cycle. If your clients are slow to pay, your cash flow is likely suffering. But, if you choose to finance using invoice factoring, you pay a higher rate for fast cash, which still impacts your bottom line. Resolving your trucking company’s poor cash flow is, sometimes, about picking the lesser of two evils.
Average trucking factoring rates
With fees on the low end of the spectrum hovering at around 1% per week and higher fees soaring near 9%, the average fee for a small trucking business is 5%. This is quite a range. Your rate will depend on your creditworthiness, and your rate can change over time.
The average invoice factoring rate for all industries is to some degree controlled by the factoring industry at large. Between 2016 and 2021, the invoice factoring industry grew by 0.4%. The factoring industry’s net worth can positively or negatively impact the fees that business owners pay. If you’re considering factoring as a financing option, you should keep tabs on the industry at large.
Avoid getting scammed
Hidden or unnecessary fees can produce ire in even the most level-headed business owners. When you’re shopping for potential invoice factoring companies, watch out for any of the following additional fees:
- Setup fees
- Maintenance fees
- ACH, wire transfer, or direct deposit fees
- Invoice processing fees
While all providers will assess some sort of additional fee, compare your options to determine which invoice factoring company will operate at the lowest cost to you.
Invoice factoring, especially for truckers, can provide a boon to your company’s cash flow when you need it most. While you have to consider if your business is likely to pay an affordable fee based on your creditworthiness and shop for a provider with low fees and limited additional fees, this working capital solution for trucking businesses could serve as a great cash flow recovery tool.
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.