What is Accounts Receivable?
Almost all trucking companies have what’s called an accounts receivable. Accounts receivable, or “AR” for short, is what your client else owes you for the goods or services already delivered. It’s common in the transportation industry for your receivables to be paid anywhere from 30 to 45 days after your client received your services. The problem with waiting over 30 days for your payment is that during that time you’ll have expenses: your fuel, your truck payment, your insurance, etc.
This is exactly why many trucking companies look into factoring. Typically, it costs about $1.38 per mile to run your truck. 26% of that is paying a driver, so if you’re a solo owner-operator, you can cut that down to around $1.02, not including food or a place to sleep for the night.
If you wait 30 days to get paid, and it costs $1.02 per mile to run the truck, how much money are you paying out of pocket while you wait to be paid? Typically, drivers average about 2,500 miles each week. If your receivables payment terms are only 30 days, and you’re getting paid on time every time, you’ll be paying more than $10,000 before you start seeing any income, and that’s not including any additional start up costs.
How Can a Freight Factoring Company Help?
When you factor your account receivables, a freight factoring company will pay you a large portion of the money that you’re owed, typically around 90%. They then send out a new invoice to the client that owes you the money, changing who receives the money from your company to theirs.
How Much Does Freight Factoring Cost?
In exchange for receiving that cash early, your costs will be a small percentage of the total invoice, usually between 1-5% per 30 days depending on the company’s policies. Generally speaking, if you’re factoring $10,000 a month, you’ll most likely see your fees in the 3-5% range. Around $300 in exchange for not waiting around on $10,000 to be paid to you sounds like a pretty good deal.
The impact of not waiting on your clients to pay you the money you’re owed can be huge for your business. If you’re a startup owner/operator working on a small budget, freight factoring can even be the difference between your business being successful or you being just the next driver to get their truck repossessed.