In the trucking industry, there are two primary methods of financing: traditional bank loans and truck factoring. Both these means of funding allow trucking companies to keep their operations running and seek new opportunities for growing revenue. Every business has unique requirements, so either financing option might be more suitable for your company. Keep reading to make an informed decision on which is best for your trucking company.
Traditional Loans for the Trucking Business
Typically, the bank issues money to trucking businesses in two forms: a line of credit or a loan. Getting a loan from the bank is similar to getting a personal loan, but there are some requirements. The approval process for a traditional loan can be lengthy. It may even cost your business more in the long run as the line of credit is added as debt or liability to your trucking business. In addition, you may also have to make upfront payments for any uncertain potential earnings. When you get a loan from the bank, you have to use collateral as security for the loan you borrow. Your business would also require you to have an established credit history.
Many businesses, including those in the trucking industry, have been taking traditional loans from the bank for a long time to facilitate the business’s operational needs. But over time, with the changes in interest rates, accessibility, and terms, the bank’s loan requirements have become more strict. For example, interest rates can spike at any time depending on the type of bank and the loan you borrow. This can lead to loans becoming more expensive.
These changes can make it difficult for trucking businesses to get approved for loans from the bank. For example, trucking companies often experience gaps in cash flow, making it difficult for them to make payments on time. This can lead to the bank imposing strict penalties. Before borrowing a loan from the bank, you should do research and ask your lender about penalties, requirements, and qualifications.
Requirements for Loan Qualification
You must also consider how much funding your trucking company qualifies for before approaching a bank for a business loan. Banks consider several factors before loan approval, including your business credit history and personal credit score.
Your personal credit score demonstrates your ability to pay back your debts, which is why your lender may require a personal credit check. However, your business’s credit score may have more significance when getting a traditional loan from the bank. You may require a business credit score of 700 or above for traditional loans.
Other than credit scores, lenders also consider your business’s yearly revenue because it can determine whether you are eligible to pay back the loan on time. To mitigate the interest rates, lenders can sometimes require you to make down payments. The longer you have been running your trucking business, the higher your likelihood of securing a loan.
How Does Truck Factoring Work?
When you use truck factoring, instead of sending your invoices to a shipper or broker after hauling goods, you send them to the factoring company. This allows you to get paid for all of your outstanding invoices in a short period of time. Without factoring, you can wait weeks to get paid on an invoice. This prevents you from taking advantage of new opportunities to grow your business and cover operational expenses.
Unlike other forms of financing available for the trucking industry, truck factoring does not result in debt as it is considered an advance of your business’s accounts receivable. This means that you do not have to worry about paying off the money; instead, you can invest it to grow your trucking business.
The cash you receive from the factoring company on an invoice can be between 70%-90% depending on the terms of your contract. You also have the option to pick the invoices you want to factor rather than feeling obligated to factor in all your invoices. This is called spot factoring. When you submit your invoices to a factoring company, the customer pays the company instead of paying directly to you. The company typically takes a small percentage of the invoice bill and forwards the remaining balance to you.
The requirements to qualify for factoring are less stringent than other financing means. For example, to qualify for factoring, the truck factoring company considers the credit scores of your customers rather than your personal or business credit history. Truck factoring also helps your business maintain a positive cash flow.
Why Truck Factoring Is the Better Option
Typically, when you pursue traditional loans, the bank offers no additional services. However, an established factoring company can provide you with more than just immediate cash on invoices. Here are some benefits of factoring that make it a better approach than traditional loans.
Improved Cash Flow
Factoring invoices results in immediate cash, which you can use to cover payroll and additional business expenses. Some factoring companies also provide their clients with fuel cards to cover fuel costs and help them save more money.
If your company meets all the requirements of the factoring service provider, you may receive approval for your application within a day or even less. All factoring companies process applications differently, but the process is typically shorter than other financing alternatives.
No History Required
One advantage of pursuing truck factoring is that it is available for new trucking companies. Factoring companies typically do not have any requirements for how long the trucking company has been in business. However, for a traditional loan, banks may not approve applications from new trucking companies.
Allow You to Take More Cargo
By factoring in invoices, you can have enough cash to cover the expenses for hauling more cargo, which is the primary source of generating revenue. You can also cover licensing and maintenance fees. In addition, factoring allows you to focus on growing your trucking business rather than worrying about paying back loans or collecting payments from debtors. Visit this website to learn more about factoring.