So, you decided to take the plunge and start your own trucking business as an owner-operator. You’ve done all the homework, obtained your authority and purchased equipment, permits and insurance. Relationships with customers, brokers and load boards will provide plenty of freight for your burgeoning business.
You’re ready to roll as the latest trucking entrepreneur.
“One day,” you think to yourself, “They’ll talk about me being the single-truck founder of a huge transportation conglomerate that dominates the shipping lanes.”
Time for a reality check
Once your business grows into that conglomerate, you’ll have an office staffed with employees who can handle tasks like customer service, billing and compliance.
For now, though, you’re it: In addition to owning the company, you’re responsible for everything, from procuring and delivering loads to equipment maintenance and repair, compliance with state and federal regulations — and making sure you’re paid for those loads you’ve safely picked up and delivered.
Keep the cash flowing
Your income will depend not only on your ability to find and haul freight, but also on your ability to bill customers and collect debts.
Any small business lives and dies with revenue flow. That means that getting paid for your work is the difference between being able to pay for your next tank of fuel or having to shut it all down and figure out your next move.
The problem is that getting paid in the business world isn’t as simple as holding out until the next payday. Most of the business you’re working with will pay their bills on a schedule, perhaps monthly. Some even delay payment, holding their own revenues in-house for 30, or 60, or even 90 days before making payment.
Others prioritize payments, covering the most critical items first. If the choice is between paying the electric bill and keeping the lights on or paying you for a load you hauled last month, you’re likely to be the loser.
Then there may be disputes to resolve. If the load was delivered but something was damaged — or maybe the item count wasn’t just right, or there’s some other reason, real or imagined — your payment could be delayed or even denied entirely.
In the meantime, your own bills keep piling up, as do expenses for fuel, maintenance and more. It’s never a good thing to be broke, but it’s worse when you’ve done the work and earned revenues that you haven’t received yet.
That’s a cash flow problem that has doomed many a business.
This is where a factor can help
One popular way to avoid failure is through the use of a factor. Essentially, a factor is a business that buys your invoices, taking on the responsibility of billing your customers and collecting from them. In return for a small percentage of your earnings, a factor assumes collection responsibilities and allows you to concentrate on the trucking portion of your business.
Be aware that the timing of payments for invoices can vary between factors.
Some pay as soon as the paperwork is turned in, and some even provide advances you can use for fuel or other needs as soon as you accept the load. The amount advanced can depend on numerous factors, and there are sometimes fees associated with advances — but at least you’ll have cash available for business needs.
Recourse or non-recourse?
If one of your customers simply refuses to pay and the factor has already paid you for that load, you may have to pay back the money you have received.
Most factors offer a choice between “recourse” and “non-recourse” payments.
In a non-recourse arrangement, the factor assumes all of the risk. You’ll pay a higher percentage of the load income for this kind of service — but if the factor is unable to collect from your customer they won’t come back to you asking for payment.
A recourse arrangement costs less, but you could be held liable if the customer doesn’t pay.
Related services may be available
Some factoring businesses offer other related services in addition to factoring services.
Some offer fuel cards that draw directly from your account. Many of these come with discounts on fuel and other needs, such as tires or shop maintenance.
Some offer assistance with obtaining permits and registration. Some even offer business guidance to help you make effective decisions and help your trucking company succeed.
Some factors can help you with recurring business tax obligations, such as keeping track of your IFTA fuel and mileage taxes, your HVUT 2290 obligations or more.
Some states require special permits for hauling certain commodities. Your factor may be able to help you determine what you need and help you obtain it.
One service offered by many factors is the ability to perform credit and other checks on customers and brokers on your behalf.
You can find out if your factor has worked with that customer or broker in the past, and whether they had difficulty collecting, or if that business has a poor credit rating. If the customer or broker hasn’t been in business long, it may mean they haven’t existed long enough to establish a good record. Unfortunately, it could also mean that they’ve shut down a disreputable business and reopened under another name, leaving their old customers holding the bag.
Some factors won’t pay for invoices from customers that have been in business for less than a year. Other conditions may apply.
Tips for choosing a factor
When selecting a factor, carefully read the agreement offered before signing anything.
Contract terms
Some factors may require long-term contracts that obligate you to let them bill for all of your loads over a long period of time. This could be an issue if, for instance, you have a longtime customer that always pays on time and is easy to work with, and that you’d rather bill directly, leaving the factor out of the relationship altogether.
Hidden fees
Another thing to watch out for is for hidden fees, like additional charges if multiple invoices need to be sent, or collection fees if a customer proves difficult.
Look for other fees such as initiation or termination charges. You shouldn’t need to pay to begin the service, or to cancel the service and take your business elsewhere if the factor isn’t performing as you expected.
Minimum volumes are sometimes specified, too. The factor may require a certain dollar amount of business or a specific number of invoices for loads. Make sure you fully understand what you’ll be obligated to, before signing anything.
Your relationship with a factor will be based on trust — both yours and theirs — so choose wisely. Check internet reviews on the company, and ask other trucking business owners for their recommendations.
In a business where cash flow is king, a quality factor can help you keep your revenue stream flowing while taking on some of the responsibility of running your business, helping you to focus on what you do best — moving freight.
Cliff Abbott is an experienced commercial vehicle driver and owner-operator who still holds a CDL in his home state of Alabama. In nearly 40 years in trucking, he’s been an instructor and trainer and has managed safety and recruiting operations for several carriers. Having never lost his love of the road, Cliff has written a book and hundreds of songs and has been writing for The Trucker for more than a decade.
