How A Haulage Firm Can Protect Its Cash Flow

On paper, a business can look to be profitable and have work in the pipeline. The issues start occurring if the company enters a negative cash flow. That is to say, more money going out on business expenses than is coming in. 

A business is only as good as the products and services it provides. Poor cash flow can be the downfall of a small business and lead to serious financial problems for larger businesses. The key to managing your cash flow lies in your invoicing process. Knowing when to invoice for work completed and how long it should take for an invoice to be paid will help you keep track of your money.

How can this be if the company is profitable on paper? 

The answer lies in the difference between cash flow and profit. Profit takes account of income and expenditure. Cash flow, on the other hand, is what a business actually has in its bank account. If a business does not have enough cash to meet its obligations, then it may have to borrow from external sources.

Cash flow is one of the most important aspects of running a haulage firm. If your business has a poor cash flow, you're unable to grow and your company's limited resources will dwindle over time. However, with careful budgeting and an eye for best practices in invoice timing, you can ensure that you avoid this pitfall.

There are alternatives

Normal terms of invoice payment average 40 days. However, some businesses average as much as 90 days to pay an invoice. This can be a long time for a small business to wait for the money to come into the business for work that has already been completed and the business expenses have occurred.

If you want to be paid faster, freight factoring could be the solution. Freight factoring or invoice factoring is a service that uses a third party that pays the haulage firm when an invoice is issued. The factoring company will then collect payment from the client when the invoice is due. This can massively improve the haulage firm's cash flow.

Freight factoring considerations

Obviously, the factoring company is taking on an element of your administration and to some extent part of your risk, this comes at a cost.

Factoring Fees

Factoring companies normally charge around 2.5 % - 5% of the invoice value, and you may be charged a set-up fee. To understand the impact on the bottom line, the fees must be included accurately in your profit and loss accounts. 

What happens if your customer defaults on the payment

Most freight Factoring businesses will have a recourse clause in their terms and conditions. This is a clause that enables the factoring company to take action if the client fails to honor the terms of their invoice. If your client doesn't pay or is late in making payment, the factoring company will expect your business to make payments until your client makes payment.

What if my client goes bankrupt?

Some companies offer non-recourse freight factoring. This is only relevant if your client declares bankruptcy during the time you submitted the invoice and its due date. In this instance, the factoring company won't approach you for payment. While this is a rare occurrence it can be a useful benefit of using a freight invoice provider.

What information is needed to apply for a freight invoicing service?

The haulage company's credit scores

To apply for an invoice factoring service, you need to provide your account details and the payment terms you expect from your customers. You may also be required to provide your credit or bank references to enable the factoring company to assess the risk of accepting you as a customer.

Client creditworthiness

The other risk the factoring company needs to assess is the creditworthiness of your clients. Some companies, especially those that work with clients overseas, may be required to provide more detailed information about their clients. In these cases, it may be wise to check with the factoring company whether they will accept your customers before applying.

Protection from fraud

The factoring company needs to ensure that they aren't going to become the victims of fraud. They need to assure themselves that the invoices being issued are genuine. While this type of fraud is rare it does happen.

Broad client base

No business should rely on a small client base because they are too vulnerable if their client is slow to pay, chooses an alternative supplier, or goes into liquidation. The same goes for haulage firms. The factoring company will need to see that you are working with a broad number of clients.

What processes have you in place?

There are actions that you can take place to reduce the risk of slow or late payment from your clients such as completing a credit check and taking up business references. A factoring company will likely want to see that these have been completed before agreeing to open a business account with you.

Additional benefits of freight factoring

Whether you are a small start-up business or a more established freight business, freight factoring can free up your time that would otherwise be used for building your business. It does that by taking on some of your account functions and collecting payments on your behalf. Having a steady and predictable cash flow will make applying for finance and business loans easier. This is vital if you decide to grow the business through acquiring new vehicles, hiring new staff, and expanding your working premises.

Freight factoring (or invoice factoring) can be a quick and simple solution with minimal paperwork. No company is perfect and it's not always possible to ensure the money will come in on time every time. If you have problems making payments to your staff or other creditors at times of cash flow issues, freight invoice factoring could be the answer you're looking for.