|Trucking Business Finance: Tips on how to Do It By yourself
In contrast to what most small truck business owners believe, funding a business is not rocket science. As a matter of fact, there are only three main ways to perform it: via debt, equity or what I call “do it yourself” funding. See Truck Factoring Costs.
Each method comes with benefits and drawbacks you should know of. At various stages in your business’s life cycle, one or more of these methods may be appropriate. Therefore, a comprehensive knowledge of each approach is very important if you think you may ever want to obtain financing for your business.
Debt and Equity: Pros and Cons
Debt and equity are what lot of people imagine when you ask them about business financing. Traditional debt financing is often provided by banks, which loan money that must be repaid with interest within a certain time frame. These loans generally must be secured by collateral in case they can not be repaid.
The cost of debt is reasonably low, especially in today’s low-interest-rate setting. However, business loans have become more difficult to come by in the current tight credit environment.
Equity financing is offered by investors who receive shares of ownership in the company, rather than interest, in exchange for their money. These are typically venture capitalists, private equity firms and angel investors. Though equity financing does not need to be repaid like a bank loan does, the cost ultimately can possibly be much more than debt.
This is because each share of ownership you divest to an investor is an ownership share out of your pocket that has an unknown future value. Equity investors often place terms and conditions on financing that can handcuff owners, and they expect a very high rate of return on the companies they invest in.
My absolute favorite kind of financing is the do-it-yourself, or DIY, variety. And one of the best ways to DIY is by utilizing a financing technique called invoice discounting. With factoring products, companies sell their outstanding receivables to a commercial finance company (sometimes referred to as a ” invoice factoring company”) at a discount. There are two key advantages of factoring:.
Significantly bolstered cash flow Rather than waiting to get payment, the business gets the majority of the accounts receivable when the invoice is generated. This reduction in the receivables lag can mean the difference between success and failure for companies operating on long cash flow cycles.
Say goodbye credit analysis, risk or collections The finance company conducts credit checks on customers and scrutinizes credit reports to uncover bad risks and set appropriate credit limits essentially becoming the businesss full-time credit manager. It also conducts all the services of a full-fledged accounts receivable (A/R) department, including folding, stuffing, mailing and documenting invoices and payments in an accounting system.
is not as well-known as debt and equity, but it’s often more useful as a business financing instrument. One explanation many trucking owners don’t consider trucking factoring first is because it takes some time and energy to make invoice factoring work. Most people today are seeking out instant answers and immediate results, but quick fixes are not always accessible or advisable.
Getting it to Work.
For trucking factoring to work, the business must accomplish one extremely important thing: supply a quality product or service to a creditworthy customer. Undoubtedly, this is something the business was created to do initially, but it serves as a built-in incentive so the business owner does not forget what he or she should be doing anyway.
Once the customer is satisfied, the business will be paid promptly by the factoring company it doesn’t have to wait 30, 60 or 90 days or longer to get payment. The business can then promptly pay its suppliers and reinvest the profits back into the company. It can utilize these profits to pay any past-due items, obtain discounts from suppliers or increase sales. These benefits will generally more than offset the fees paid to the factoring company.
By using a truck factoring company, a trucking business can increase its sales, establish strong supplier relationships and strengthen its financial statements. And by relying on the factoring company’s A/R management products, the business owner can focus on increasing sales and boosting profitability. All this can happen without increasing debt or diluting equity.
The typical truck business uses trucking factoring companies for about 18 months, which is the amount of time it usually requires to achieve growth objectives, pay off past-due amounts and strengthen the balance sheet. Then the business will likely be in a better position to look for debt and equity opportunities if it still needs to. Also see Truck Factoring Costs.