As a business owner, if your company is growing at a considerable rate, your profit margin is expanding every year, and your sales are exceeding numbers that even you anticipated, then you’re definitely headed in the right direction.
However, that’s no cause for you to let your guard down.
Even the most profitable business can experience a serious cash-flow problem if they do not manage their financial resources accordingly.
A negative cash flow for a trucking business means it might not be able to pay its drivers on time or have money to pay for fuel. This could severely dent a trucking company’s ability to serve its clientele, and ultimately, its reputation.
While cash flow problems are common for small trucking companies or those that have just gotten into the industry, it doesn’t mean that they have to be a death sentence. This article seeks to explain a few options trucking businesses can explore when the money is thin.
But first, let’s look at the reasons why your trucking company might be experiencing cash flow problems before analyzing the potential solutions.
Causes of Cash Flow Problems for Trucking Companies
1. Not Tracking Expenses
At its very basic definition, cash flow for a company is the money coming in compared to the money leaving the business. As such, setting up a system of accounting to track how much you’re spending on operational costs and the money you’re making will give you a clear picture of your cash flow.
Paying cash for assets or paying off invoices without putting them on record can put you in a very detrimental situation at the end of the month or financial year.
Ideally, from when you start your business, you should track how much you’re spending on fuel for your trucks or driver salaries, as well as the revenue you earn from hauling loads for your clients.
A simple spreadsheet detailing income and expenses can more than compensate for the work.
That is until you’re able to upgrade to a more comprehensive accounting software system for accounts receivable and payable.
2. Poor Truck Management
Mismanaging your fleet of trucks can put a serious dent in your revenue. Without well-serviced trucks, you will not be able to transport loads as effectively as you should. This will drive both existing and potential clients away from your company, consequently affecting your cash flow.
While it can be difficult to predict if a truck will break down or not but you can reduce the likelihood of such a scenario by frequently servicing your fleet. This will help you provide better service to your customers.
3. Spending a Lot of Money During the Startup Phase
Startups are called ‘startups’ with good reason; they are at the start of what you want to be a successful and worthwhile venture.
As much as you might want your company to be successful from the get-go, things just don’t work like that. Unfortunately, a lot of business owners spend a lot during the startup phase which often puts their businesses in a cash hole that’s difficult to come out from.
Yes, you do need capital to get your trucks on the road but you don’t have to overdo it with costly things such as buying excess trucks that you shouldn’t try to do until your business is up and running.
It might take you a while but keep your eyes on the future, or in this case, the road. Even Apple began with two people in a garage.
4. Being Too Passive With Delayed Receivables
It can be hard developing and sustaining good customer relationships, especially if you’re just starting out in business.
You want to offer terrific service and flexible payment plans to your clients. But when you allow delayed receivable invoices to stretch for too long, you might be putting yourself in a cash flow problem. For instance, without timely payments from your clients, you will not be able to pay your employees. This will affect how well you serve new clients.
Good business practice in the trucking industry to help solve such a scenario is to factor your invoices. We’ll get more into detail on that further on.
Good Business Financing Options When Cash Is Tight
1. Invoice Financing/Factoring
The trucking industry can be very volatile. Freight companies often take loads from several clients, sometimes at one go but they often have gaps in income as they wait for customers to settle their payments. This can lead to inconsistent cash flows that will impact the company’s capability of making timely deliveries or maintaining its fleet of trucks.
One very viable solution to this challenge is invoice factoring, also known as invoice financing or accounts receivable factoring. The process involves trucking companies selling client invoices for a cash advance worth nearly the same sum amount of the invoice. The factoring company then collects the payment from the trucking company’s client.
Whether you’re a new trucking business or have established a strong foothold in the industry, you should consider creating a profile with a factoring company such as Ezinvoicefactoring.com even if you don’t need factoring services right now.
This protects the trucking company from having to wait for 30, 60, or 90 days for a client to settle their payments, thus helping the company maintain a positive cash flow. Here is a list of more benefits your trucking company can expect from invoice factoring.
2. Traditional Bank Loan
Banking began in the 18th century and has evolved to become a juggernaut industry in the financial sector. Companies in need of working capital can apply for a short or long-term business loan from a bank to help them stay afloat.
However, banks are approving lesser and lesser business loan applications in the wake of a rather unpredictable economy.
A new trucking company that hasn’t quite had enough history of operations or established good credit will find it hard to get a loan with good interest rates, much less be approved of the loan at all. It might even take as long as several weeks or months before you receive the funding you need at which by that point you might have lost a lot of possible clients.
3. Working with Venture Capitalists or Angel Investors
A lot of people make the mistake of confusing venture capitalists and angel investors to be one and the same. While the working concept may be the same, there is one glaring difference that sets them apart.
Venture capitalists are large companies that invest in a business in exchange for equity in the business. An angel investor, on the other hand, is a sole individual who will invest in a business by trading equity for capital but is more likely to invest in a business that a venture capitalist might not find very attractive.
One largely overlooked benefit to this option is the abundance of business knowledge and industry connections that a business can benefit from by working with a VC or angel investor.
Access to Quick Cash
When you’re running a trucking business, you need to have ready cash flow so that you can handle any immediate expenses. For instance, you might need the money to pay fuel costs for a lucrative contract you might have acquired.
Receive Financing Even With a Poor Credit Score
With invoice factoring, trucking companies can still acquire the funding they need to keep their trucks moving even if they have an undesirable credit rating.
Factoring companies do not consider the credit score of the trucking company but that of the client invoiced instead. This means even if you have a pending loan from a bank, you’ll still receive the money you need to sustain a positive cash flow.
Factoring Will Help You Take on More Loads
Factoring companies provide trucking companies with the cash advance they need to continue operating. This means the carrier will have more financial flexibility to invest back in the business by hiring more drivers to transport more loads, buying new trucks, or paying for fuel expenses.
Protects the Trucking Company From Bad Debts Through Non-Recourse Factoring
One benefit of invoice factoring that does not receive as much credit as it should is how the practice protects the carrier from bad debts.
Bad debts happen when a client defaults on payment for a transported load. But with non-recourse factoring, the factor is financially liable for the loss if a client is unable to settle a payment.
Factoring companies also look at the credit score of potential clients before a trucking company consents to doing business with the client. This aspect of factoring is very important since it can provide a trucking company with valuable insight that can help the carrier determine whether they should proceed or avoid the potential client.