Why doesn't a shipper go directly with a carrier?
Working with a factoring company provides a lot of benefits due to the fact that you’re able to focus on your core competency of driving your truck, finding customers, and picking up the next load. You need to be top line driven and revenue focused rather than the tiny details of back office work, billing, collections, etc. But as you grow, it’s important to understand those variables if you ever want a chance to break out on your own and build a larger trucking company and eventually remove factoring as a solution altogether.
To do that, it’s important to understand the operational capabilities of 1 truck and the credit limits of how a factor views that 1 truck so that one day you can understand how to manage your invoice aging, and expectations on what your receivables and ultimately how healthy your balance sheet looks.
To start, let’s look at a 1 truck trucking operation. Freight rates are currently low, therefore let’s assume the average load size is approximately $1,000-$1,200. A good carrier might be able to run 15-20 loads a month so we’re hoping for approximately $5000/week and $20,000 every month. So does that mean your Invoice Aging should only be $20K outstanding all the time and you can expect a credit limit of that? If you’re collecting 30 days on every single load then, yes, but that’s not reasonable. You’re going to have some loads pay early, and some loads pay late.
If we know that every invoice isn’t going to collect in 30 days, then we need to come up with some assumptions in order estimate what type of credit limit is acceptable for a 1 truck operation. In order to give a little wiggle room, the best credit limit for a 1 truck operation should be approximately $30,000. In the example above, this gives that same good carrier 15 additional days for their invoices to get collected on. Remember, if we assume that a good carrier can haul $20K in 1 month (30 days), then it’s safe to say they can haul another $10K in the next half month (15 days).
If a 1 truck operation hits or exceeds their credit limit, it tells the factor a number of different things:
- Their invoices aren’t being collected and they’re aging out over 45 days
- That the 1 truck operation is doing more than $20K per month either with hauling more valuable freight or higher paying loads and needs their credit limit increased
- That the 1 truck operation has hired or added more trucks to their operation.
These are all important factors that a factoring company reviews in the credit limit for a 1 truck operation and should be evaluated and studied for smaller companies looking to grow their operation into a larger fleet.
One day you will be working with a bank rather than a factor and it’s important for you to manage your invoice aging just like your factor does. Know the credit limit for each truck. Know when you’re invoice aging falls out of range. Pay attention to credit and ensure you’re collecting in less than 45 days. When you’re working with a bank and have a credit line to finance your operation, your finance costs become very important so maintaining low balances will allow your operation to grow and scale.
When choosing a factoring relationship, you want a partner who understands your ultimate end goal and prepares you for operating on your own. Lowering your financial costs needs to be your main priority during your growing phases and OperFi will work to ensure that you are aware of your credit limits and how they apply to your growth.
Reach out to your OperFi rep to see if you can get approved for the most exclusive trucking factoring relationship on the market. OperFi is changing the way Trucking Entrepreneurs interact with their factoring companies. Transportation Factoring and Freight Factoring shouldn’t force you to be another number. Give us a call and experience the OperFi difference and see why our carriers plan their business growth with OperFi service.
Contact OperFi today to get a free consult and learn how to earn more profits for your trucking company. OperFi is changing the way Trucking Entrepreneurs interact with their factoring companies. Transportation factoring and Freight Factoring shouldn’t force you to be another number. Give us a call and experience the OperFi difference and see why our carriers plan their business with OperFi service.