Managing Payment Lags in Freight
One of the greatest challenges in a business with a physical service or product is the delay between completion of the work and the receipt of payment. While most businesses pay their bills on the same net-30 terms that they use with their own customers, new businesses in particular may not have established credit with their suppliers and could consequently struggle to keep current with them if receivables are taking too long.
Freight is a particularly problematic issue. A typical run has predictable costs for the fuel and driver, but outside factors like traffic, road construction, poor directions, and other interference can drastically increase those expenditures.
Controlling those costs is vital. Your company will be more successful if they implement smart cost-saving strategies. Finding a solution to these challenges can be the difference between profitability and failure for businesses of any age, so making that happen is a high priority for management.
Successful operators have used several different strategies to handle this situation. They make sure their drivers know what weather is ahead and where road work is being done. They use a good maintenance program to maximize fuel economy, and they train personnel on proper loading to reduce damage to shipments.
Those are strategies for managing payables, but there is still the issue of receivables. There are a number of ways to ensure that your customers get your payments made on time, but transportation factoring is one of the most effective.
Factoring is a fairly simple process. Rather than directly billing your customer, you sell the invoice to the factoring company at a discounted rate. This discount is how you pay the factoring company, so there’s no separate bill from them. Once you send the invoice, you get your money immediately and the factoring company deals with getting paid by the customer.
This system isn’t some complicated shell game. It’s actually a reflection of what’s taking place in countless other industries. They have all learned that separating the various costs and spreading the inherent risk among other parties is a great way to help everyone be more profitable.
Agriculture has been doing this for years. Instead of a single farmer doing the entire production process, many crops today have some producers who produce only the transplants, others who grow, and others who process for transport. That way, each producer only carries risk in one of the three categories instead of all three.
Factoring works the same way. You’re distributing the risk of late payments to a specialist that can devote itself fully to collecting payment because it’s not spending time doing anything else. It’s just like having an established department that understands why customers pay late and how to deal with it.
A business model like this can be very effective for you, even before you open your doors. Because collecting payment is one of those very problematic areas for new businesses, would-be investors and lenders want to know what your plan is for handling it.
A good business plan will allow for that; if you mention that you plan to use a factoring service, you’ve not only acknowledged the importance of managing receivables, you’ve also assigned the task to someone with more resources and experience than yourself. Likewise, as you subsequently make proposals to improve sales, you’ll convey a more positive message if you incorporate a factoring strategy. Your customers will prefer paying through the factoring company because it will provide more flexibility in how they pay, while still keeping the customer in your good graces for future shipments.
Transporting freight is a very unpredictable business. Weather, traffic, theft, and countless other issues can get in the way of an efficient delivery. When you consider the added burden of getting paid for your deliveries, the uncertainty can be almost unmanageable.
Developing a strategy that will get you paid in a timely fashion is just good business, and freight factoring can be the centerpiece of that strategy.