Common Causes of Cashflow Problems
- Long Pay Terms – In the trucking industry, pay terms are typically 30 – 60 days but can take as long as 90 days, leaving smaller companies struggling to pay overheard and operating expenses on time.
- Overhead Expenses – Dispatch, accounts payable, accounts receivable, back-office tasks, etc. all add up.
- General Operating Expenses – Truck service and maintenance can be unexpected and expensive, leaving companies to come up with money quickly. Then there’s planned expenses like fuel, driver and employee pay, insurance premiums and more.
- Taxes – You’ll have annual taxes as well as IFTA, which is quarterly. If your tax bill is larger than anticipated, you may use all of your cash reserves and then some.
Your Primary Financial Options
Factoring is when a factoring company purchases your open invoices. You usually receive payment for those invoices within 24 hours. The factoring company then collects payment on those invoices from your customers. Factoring fees are determined as a percentage of an invoice value—usually between 1.5% and 3.5% for each receivable.
The main reason a company chooses to factor is to get paid on their invoices quickly, rather than waiting the 30, 60 or sometimes 90 days it often takes a customer to pay. How much a company factors will depend on their unique business needs. Some companies factor all their open invoices, while others factor only invoices for customers that traditionally take longer to pay. With factoring, companies get the increased cash flow they need to pay employees, handle customer orders, take on more business, etc.
Asset-Based Lending (Bank Loans)
Asset-based lending is a loan or a revolving line of credit that is secured using a company’s assets as collateral. Like factoring, asset-based lending can use receivables as collateral, but it can also extend to other assets like equipment, real estate, inventory and raw materials. Asset-based loans are priced with an annual percentage rate (APR), often ranging between 7% and 15%.
The amount of money a company can borrow through asset-based lending depends on the value of the assets that are offered as collateral. Asset-based loans provide a loan-to-value ratio (LTV), which can be between 75% and 90% for receivables, but often 50% or less on other collateral. If the value of your company’s assets changes, that will affect how much money you are able to borrow through an asset-based loan.
How Do Bank Loans Compare to Factoring?
The approval process for factoring generally involves reviewing the credit ratings of your company and your customers, which only takes a few days. To qualify for an asset-based loan, however, the value of the assets that will be used as collateral need to be verified. This can take the lender several days or even weeks.
Asset-based lending is typically more discreet. Before you enter into a factoring agreement, the factor must contact your customers to verify their accounts with your company. The factor will remain in contact with your customers since it will be handing collections on the invoices. There is usually little interaction between a bank and your customers, unless you are using your accounts receivable as collateral.
Finally, factoring is a sales transaction, not a loan. There are no required monthly payments to a lender. The factoring of invoices takes place with each sales transaction, which means that funding from factoring can “scale up” with your company’s growth as your receivables increase.
Merchant Cash Advance (MCA)
A merchant cash advance is a financial service where an MCA provider offers a cash advance based on your future sales. You pay back the advance plus interest in installments from an agreed-upon percentage of your daily credit card sales. Oftentimes, it’s between 10 – 20%. This means the daily dollar amount that is debited directly to the MCA provider will vary, depending on the total amount of your credit card receipts on a given day. Interest rates for MCAs are typically high so you may end up paying as much as 20 – 40% more than the amount advanced.
Merchant cash advances are most often used by companies that have a lot of credit card sales, such as retail stores and restaurants. It’s easier for a small business that may not have a great credit history to qualify for an MCA.
How Do Merchant Cash Advances Compare to Factoring?
Factoring provides access to cash that has already been earned. A factor will only purchase invoices for your customers that have a decent credit rating. Once the factor purchases the invoice, your risk of customer nonpayment is drastically reduced. The factor gets paid through factoring fees collected from each invoice.
A merchant cash advance is funded from future sales. Once your application is approved, you’ll receive payment typically within two days. With no collateral and no personal guarantee required, the risk to the lender is high. This means the interest rates and fees may be high. The MCA provider gets paid a daily percentage of your sales through direct access to bank account, until the loan amount plus interest is paid in full. Penalties from MCA lenders for nonpayment are harsh and can often cause additional financial hardship.