Did you ever experience getting too low on your cash that it has affected your whole operation? What did you do to recover from it?
Hotshot trucking has some challenges. For one, the demand can be unpredictable and at times unstable. Then you also have to consider the maintenance cost of your fleet as well as the cost of running your entire operation. If you are in the hotshot trucking business long enough, you’d probably agree that in most cases, the waiting time for payment is between 30 and 90 days. If you rely heavily on your collection, it can tremendously slow your business down.
Luckily, there are ways on how you can reduce your waiting time to collect your accounts receivable. Some brokers offer a quick pay option for as fast as 48 hours but at a discounted rate that can range between 5% and 10% plus a fee. For instance, if you’ll run a load for $5,000 and a broker offers a quick pay option at a 5% discount, you’ll get $4,750 for that particular load.
Another option is invoice factoring which we will discuss more in this article.
What is Invoice Factoring?
Invoice factoring is similar to quick pay option; however, factoring companies will generally handle most, if not all, of your receivables from direct customers and other brokers. This means that you don’t have to deal with different brokers, which is the case for the quick pay option. Also, invoice factoring generally charges lower fees.
Factoring companies typically advance funds on a percentage of your invoice. Once your customer pays the invoice, they will pay the remaining percentage less any fees. You can take advantage of invoice factoring to cover your day-to-day business expenses and grow your company.
How Does Invoice Factoring Work?
The application process for invoice factoring is straightforward. If you like to get an idea about how much a factoring company is willing to pay for your invoices and how much they will charge you, you could request for a free quote. You may also request for the company to call you to discuss your cash flow situation and needs.
Once you agree to their terms and conditions, you can then apply for invoice factoring. The requirements vary across different companies. Once you finalized the agreement or contract, you can then submit your invoices and relevant documents. The factoring company will then give you the funds via direct deposit to your account, check, wire transfer or other means.
Factoring companies also differ in terms of fee structure. Those that claim to be the cheapest and fastest do not necessary mean they are the best for your business. If the fee looks ridiculously lower that the average in the market, you may want to take a closer look at the fine print and check if there are hidden fees such as processing fees, background check fees and invoice submission fees among others.
Factoring fees range from 1% to 5% of the face value of the invoice. There are companies that offer lower fees but they typically charge expensive hidden fees.
The advance rate is the percentage of the invoice value that you will receive right away. This can range between 70% and 90%.
Factors to Consider When Choosing a Factoring Company
Some factoring companies require minimums per invoice or per total monthly invoice amount. If you don’t meet the minimum, you could end up paying more than their advertised factoring fee. If you want more freedom in terms of how much to factor for each month, go for a factoring company with no factoring minimums.
Some companies will require you to factor all your customers including those customers that pay you in a week. Choose a factoring company that lets you select what invoices to submit, unless you want to factor your entire portfolio.
Allows for non-recourse funding
Recourse funding is typical among hotshot factoring companies. This means that the business owner assumes the risk if the customer fails to pay the invoice submitted for factoring. Some companies offer non-recourse funding wherein the business owner assumes no risk. However, since it involves higher risk on the part of the factoring company, the fee is typically higher.
Recourse funding offers savings if you know your customers well and you are confident that they will pay you. On the other hand, non-recourse funding is a good choice if you frequently receive new customers and you are uncertain about their credit profile.
Experience in hotshot trucking industry
Although the process of invoice factoring might be standard, there are some perks if you choose a company that is experienced in hotshot trucking. These companies offer other benefits such as fuel advances, fuel cards and other benefits that are not available in others.
If a factoring company has been around to help hotshot trucking businesses, you could try to read reviews about them in hotshot forums. Positive and negative feedback about a factoring company can help you make the right decision.
Invoice factoring can help your hotshot trucking business maintain a steady cash flow and run your daily operation. Our general guide about invoice factoring should help you get started.
Did we miss any important point about factoring? Please let us know in the comments section below.