You may be starting your own business and getting phone call after phone call of businesses wanting to sell you something. Whether its insurance products, software or even just business cards, you’re getting bombarded with hungry vendors looking for their next customer. You’re motivated to get started and itching to get out there and change the world and make it big.
Problem is it’s hard for someone to give you a shot. You know you can make it and you’ve been working your whole life up until this moment to get your chance to prove everyone wrong and become your own boss. You start going to banks and other financial institutions to get approved for loans, working capital, or other forms of financing to get your business off the ground. Sure, you can go to the SBA but not all companies are approved and let’s face it, you’re still working with lenders and they all have strict requirements of who they want to work with.
So you know the business, can get customers, but in order to grow and scale your operation, you realize that there are a lot more administrative, billing, collections, and accounting functions that you may not have anticipated. On top of this, you’re realizing working with payables departments from a handful of companies ties up your time and resources. Your invoices or accounts receivables build up on you and you’re spending more time collecting rather than the growth.
That’s where factoring can solve a lot of your problems. Invoice factoring is one of the oldest forms of business financing. Technically, it’s not even financing. It’s just a method of getting working capital. Factoring has been around for thousands of years because sometimes it’s easier to get paid today than to have to wait. After all, time is money, right?
Factoring is the buying and selling of accounts receivables (or invoices). It’s a type of commercial finance where you’re selling your legal right to collect on your invoices to the buyer who assumes the risk. Now, there are multiple types of invoice factoring including recourse and non-recourse factoring where risk can be transferred and each one requires thorough research on which one is best for you.
When you sell your invoices to a factoring company, you’re selling the invoice at a discounted rate in exchange of getting funded today as opposed to waiting 30 or even 90 days to get paid by your customer. The factoring company takes care of billing and collecting on the invoice so you don’t have to. The rates you are going to pay depend on a number of variables including the size of your company, the riskier your company is and the industry you operate in.
Some industries are better suited for factoring than others. Also, let’s be clear that factoring is really only suited for B2B transactions because it doesn’t make sense for a company to sell its receivables if their customer is a consumer. Factors aren’t in the business to collect from the average consumer.
Trucking, for example, is a perfect industry in which companies benefit from the services of a factor. In trucking, the carrier performs their obligations and moves freight for another customer and sends them an invoice for their services. After they send them a freight bill, the company waits approximately 30 days to get paid. Normal net terms for businesses within the transportation space is net 30 but depending on your customer, some carrier agreements or master service agreements will call for 90 days. Everything depends on the customer you’re working for and how well capitalized they are and their own personal financial situation.
The average trucking company is a perfect fit for factoring because trucking is the type of business which is working capital intensive. The carrier needs to fuel up, get to the next destination, the next load, or dead head home to feed their families. Also, another nuance within the trucking industry which is different than others is that payroll usually happens on a weekly basis. Trucking company owners need to pay their drivers weekly so waiting 30 days to get paid on a load where you have to pay your driver next Friday on, becomes a heavy burden to bear.
Transportation Factors fill that void and provide trucking companies and trucking entrepreneurs with the working capital and back office support needed to stay in front of their business. It’s not always the cheapest solution in town but for new startups, it provides a way to get the working capital needed to get going. The best recommendation for a trucking company is to try and grow your operation gradually and ease your self out of factoring and hopefully get bank financing down the road.
Once a company can reach about $1M in monthly revenue, they may qualify for cheaper financing opportunities and banks might find you more attractive. To break it down in truck counts, the average Over the road (OTR) truck can produce approximately $20K in monthly revenue. That means if you can grow your company to the 30-50 truck ranges, you might be in the ballpark for a bank to be more interested in a financial relationship offering bank qualifying rates.
OperFi can help you every step along the way. From the new startup looking for a new factoring company to initially help them launch to a more sophisticated operation seeking bank financing, OperFi can help with your working capital or consulting needs. OperFi is a transportation factoring company with years of experience helping the trucking startup become successful. OperFi is a trucking factoring company who understands the needs of the new trucking company and is interested in turning Trucking Entrepreneurs into successful business people.