Maintaining a decent cash flow in the transport and haulage industry can be challenging, especially when considering fluctuating fuel costs and increasing operational expenses.
Cash flow challenges make it difficult to grow your business or take advantage of new opportunities, such as acquiring a new vehicle or luring a new client over to your company because you don’t have the capacity.
Transport finance provides opportunities for transport companies to release working capital tied up in unpaid invoices, which can often go unpaid for 30, 60, or more days.
Consider Flexible Invoice Financing Options
Banks and other large financial institutions are not your only options for accessing cash flow, nor do they offer the same level of flexibility as other financing systems, such as debt factoring. Consider the flexible invoice financing options below, because one of them may be just right for your transport business.
Four Types of Invoice Financing
Invoice financing has received an unwarranted reputation as a fast but expensive type of financing that should only be used as a last resort. However, the claims are unfounded and depend a lot on who your provider is.
Many organizations now use flexible invoice finance options like debt factoring to smooth out the dips and troughs in their cash flow. The expenses are negotiable and comparable to bank financing, especially when you consider the many hoops a bank will typically ask you to jump through before making the cash available.
A flexible invoice finance arrangement will not lumber you with a long-term contract, nor will you be faced with early payout penalties once your customers come good on their invoices.
The transport industry has its own unique set of challenges when it comes to cash flow, and not all types of invoice financing will work as well as the next. Here are a few of the different kinds of flexible invoice finance options available.
1. Invoice Factoring
You will often see the term invoice factoring used interchangeably with invoice financing, but there are differences. An invoice factoring finance agreement will involve the factoring company advancing your business the funds on unpaid invoices and taking up collection responsibilities.
You reduce the load on your administration staff, but some of your clients may not appreciate a third-party chasing up the invoices. If you think your clients will be touchy about dealing with another company collecting payment, other invoice financing options will work better for you.
2.Invoice Discounting
Invoice discounting uses your unpaid invoices as collateral for a loan. This type of invoice financing is very short-term because the invoice factoring company can update the amount owed as soon as the value of accounts receivable changes. The amount of finance available is an agreed-upon portion of the outstanding amount, usually around 80 to 90% on invoices less than 90 days old.
This type of flexible invoice financing doesn’t work if another finance company has blanket title over company assets used as collateral on a different loan. An advantage of invoice discounting is that your customers will remain unaware of the arrangement.
3. Selective Invoice Financing
A selective invoice financing arrangement gives you more control over which invoices you sell. The advantage here is that you can use your most significant invoices to secure finance rather than many smaller ones. This type of flexible invoice finance could be suitable for a large transport company dealing with substantial accounts.
4. Recourse and Non-Recourse Invoice Factoring
In recourse factoring, your company sells an invoice with an agreement that you will buy back any unpaid invoices. Lenders will fund the invoice for an agreed-upon number of days after the due date. Non-recourse factoring is similar, except the factoring company remains liable for outstanding invoice payments.
Debt Factoring Advantages
Debt factoring advantages and disadvantages are par for the course for any financing arrangements. Here’s what you need to know about debt factoring.
Fast Access to Cash Flow
Once you complete the initial application process and submit the relevant invoices, the cash arrives in your bank account with 24 to 48 hours. If your cash flow needs an urgent injection, invoice factoring is much faster than applying for a bank loan or overdraft.
Smooths Out Cash Flow
Transport companies often have highly irregular cash flows due to significant invoices with extended credit terms. It’s a situation that can add challenges to monthly bill paying. Invoice factoring can provide you fast access to cash to take advantage of growth opportunities, such as buying new vehicles to cope with a new client opening a large account or putting on more staff for a surprise big job.
Lower Administrative Costs
Some factoring arrangements involve the invoice factoring company taking over the debt collection, which can reduce the workload of your administration department.
Debt Factoring Disadvantages
Debt factoring is an incredibly flexible invoice finance option. Still, it’s always good to know about debt factoring’s advantages and disadvantages before deciding if it will be good for your business.
Customers May Not Appreciate Another Company Collecting on Invoices
In a few debt factoring arrangements, the onus is on the factoring company to collect on debts. Some customers may be sensitive to such practices, and it could harm your relationship with them. Use an invoice factoring option where your customer remains unaware of the arrangement.
Bad Debt Liability
There is always the risk that the factoring company will send unpaid invoices back to you for reimbursement should any of your customers not pay. Use a non-recourse arrangement for riskier invoices, or only use the invoices of reliable customers as collateral for invoice finance.
Slow Paying Customers Can Create Excessive Fees
Every day that an invoice remains unpaid adds to your financing costs. Use selective invoice factoring, so you are only using your best paying customers’ invoices as collateral. Doing this will reduce the risk of your invoices going unpaid.
Need to Know More About Flexible Invoice Finance?
If your transport company is looking for flexible finance options to smooth out cash flow troughs or needs to finance a growth opportunity, get in touch with Ignite Business Group to find out how flexible and affordable debt factoring can be for your organization.
If you would like to find out more about Invoice Financing for transport companies call us on 01332 896 020. Or, email us enquiries@ignitebusinessgroup.com to see how we can help your business’ cashflow.
