by Ashley Wilks
Any business can find itself experiencing a cash crunch, and trucking is particularly susceptible. Seasonal business slowdowns, slow-paying customers, a period of expansion that means payables surpass receivables — all these are fairly common in the industry.
The largest fleets are positioned to handle temporary income dips. Small and medium-sized fleets may find a few more obstacles while weathering cash flow storms. Trucking companies have numerous options to get through tight times, so it’s important to considering which one works best for your fleet.
Loan or Investment from a Relative/Friend
This option can be dangerous because it’s tough to keep emotions out of the transaction. Once someone you know lends you money they may feel that they have a say in your spending. If they actually invest money in the business, that feeling will intensify (even if they promised to be a silent partner).
In order for this arrangement to work, expectations must be crystal clear on both sides. If it’s a loan, what is the repayment schedule; will there be interest charged? If it’s an investment, what say does the investor have on future business decisions?
How many successful entrepreneur stories start with a tale of maxing out credit cards? Interest rates with credits cards are typically higher than other cash flow solutions, which can end up putting a business in a deeper hole than it can handle. A study by the Kauffman Foundation on the impact of credit card debt on young companies found that every $1,000 in credit card debt taken on by a small business increases the probability of its closing down by 2.2 percent.
When used judiciously, this method can help a new business establish credit, but it’s best suited to daily expenses rather than a way to delay payment on costly items.
A company that can get a small business loan or set up a line of credit with an established bank is getting more than money. The strict requirements they must meet to qualify indicate that the business is on solid ground. Banks don’t lend money without confidence that it will be repaid, or knowing that there is collateral being offered to cover any losses.
Qualifying for a loan, or a line of credit, can be incredibly difficult for a young company or a seasonal one that has fluctuating revenue. The process can take weeks to complete, without any guarantee that the loan will be approved.
A factor buys a company’s accounts receivables, taking on the task of billing and collections. The company gets cash for its invoices right away, without incurring debt. In addition to resolving cash flow problems, a factoring company takes on the time-consuming task of collections, and provides credit-checking services to cut down risk of non-paying jobs.
Factors come in many forms, from a lone lender making arrangements in a home office to financial institutions that have set up a factoring department to established, financially secure, industry-specific factors. Companies need to do the research and get recommendations to find the factor that is right for their needs.
Ride it Out
This is the “go-to plan” of the optimist waiting for the moment when everything will turn out just fine. And sometimes it does. More often, being proactive ends up being a key catalyst in successfully weathering a downturn. If a company owner sees a bumpy financial road ahead, honesty and communication are a necessity.
Getting in touch with creditors to ask for an extension or work out a plan for partial payment shows good faith. Missed payments without explanation can destroy relationships and a company’s credit standing.
Cash flow issues are common in trucking. Being prepared for them by understanding your options for better managing cash flow is a critical first step in avoiding disruptions in your day-to-day operations.
Are you a Fleet Owner looking to grow your trucking business but limited with current financing options?
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