|Trucking Business Investment: The best ways to Do It By yourself
In contrast to what most small trucking business owners believe, funding a business is not rocket science. In truth, there are only three primary means to do it: via debt, equity or what I call “do it yourself” finance.
Each approach has benefits and drawbacks you should know. At various stages in your business’s life cycle, one or more of these methods may be appropriate. That is why, a thorough knowledge of each technique is necessary if you think you may ever want to get funding for your business.
Debt and Equity: Pros and Cons
Debt and equity are what many people think about when you ask them about business financing. Traditional debt financing is normally provided by banks, which loan money that must be repaid with interest within a certain period. These loans often must be secured by collateral in the event they can not be repaid.
The cost of debt is relatively low, particularly in today’s low-interest-rate environment. However, business loans have become harder to come by in the current tight credit environment.
Equity financing is given 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 have to be repaid like a bank loan does, the cost in the long run can possibly be much higher 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 funding that can hog-tie owners, and they anticipate a very high rate of return on the companies they invest in.
My preferred kind of financing is the do-it-yourself, or DIY, variety. And one of the best ways to DIY is by utilizing a funding technique called factoring. With receivable 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 benefits of factoring:.
Noticeably bolstered cash flow As opposed to standing by 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.
No more credit analysis, risk or collections The finance company does 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.
Truck Factoring is not as well-known as debt and equity, but it’s often more useful as a business funding tool. One reason many trucking owners don’t consider truck factoring first is because it takes some time and energy to make invoice factoring work. Many people today are seeking quick answers and immediate results, but quick fixes are not always accessible or advisable.
Making It Work.
For trucking factoring to function, the business must achieve one extremely important thing: supply a high quality product or service to a creditworthy customer. Naturally, this is something the business was created to perform to begin with, but it works 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 factor it doesn’t need to wait 30, 60 or 90 days or longer to get payment. The business can then quickly pay its suppliers and reinvest the profits back into the company. It can make use of these profits to pay any past-due items, obtain discounts from suppliers or increase sales. These benefits will often more than offset the fees paid to the factoring company. See here Trucking Factoring Costs.
By using a trucking factoring company, a trucking business can increase its sales, build strong supplier relationships and enhance its financial statements. And by relying upon the invoice factoring company’s A/R management programs, the business owner can prioritize growing sales and boosting profitability. All of this can happen without increasing debt or diluting equity.
The average truck business uses trucking factoring companies for about 18 months, which is the time it usually requires to achieve growth objectives, pay off past-due amounts and strengthen the balance sheet. Then the business will likely find themselves in a better position to pursue debt and equity opportunities if it still has to. Be sure to also read about Trucking Factoring Costs .