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Small and mid-size companies and owner-operators, in particular, tend to experience cash flow problems from time to time. Even if there’s steady work on load boards, it can be frustrating to have to wait for payments. Oftentimes, the solution is to use some type of financing to maintain a sufficient cash flow. Two common options are invoice factoring, which includes freight factoring, and a business line of credit. Here’s what you need to know about both of these options.

Business Line of Credit

Similar to a credit card, a line of a credit for a business allows the account holder to draw from the available amount when funds are needed to cover expenses such as payroll and truck maintenance. Payments will need to be made as per the specific terms of the lender. Generally, lenders consider three factors to determine eligibility for a line of credit:

  • Available collateral
  • Current cash flow
  • Credit history

Invoice Factoring

Many trucking-related businesses extend payment terms to clients in a way that gives them anywhere from 30 to 60 days to pay. Since smaller operations often have a narrow profit margin, it can be difficult to meet financial obligations with payments coming in one or two months after loads have been picked up and delivered. With invoice factoring, invoices are sold to a factoring company like Pay4Freight. A significant percentage of each invoice total is given upfront, and the remainder (minus the factoring company’s fee) is provided when invoice payments are received.

Factoring vs. Line of Credit

Invoice or freight factoring tend to work well for lower margin transactions. It can be difficult to qualify for a line of credit. In some cases, personal assets have to be used as collateral if business assets aren’t sufficient. Qualification requirements for factoring, on the other hand, are usually much easier, with trucking companies/owner-operators typically required to have:

  • Good commercial credit
  • No immediate risk of bankruptcy
  • An accounts receivable free of UCC liens

The amount of time it takes to secure a line of credit can range from weeks to months, depending on how much is being requested. Factoring lines, however, are usually available fairly quickly. With credit limits, factoring offers more flexibility. Limits with factoring are usually based on how many credit-worthy customers you have. Factoring lines are also typically easier to maintain because there aren’t as many non-negotiable requirements attached.

As for collateral, a line of credit is usually backed by your business assets. With factoring, your accounts receivable is the collateral. If you need to boost your credit limit, it can be difficult to do this with a line of credit. Factoring companies are generally more flexible with such requests, especially if they see that you have a steady flow of customers and reliable clients that pay their invoices on time.

So, What’s the Verdict?

There is no “best” solution. As a general guideline, however, a line of credit can be a good choice if you have a lot of assets, your truck-related business is well-established and profitable, and you are able to meet all of the requirements and stipulations most lenders have. Factoring can be a smart option if:

  • Your trucking operation is fairly new and steadily growing
  • You have clients that routinely pay on time
  • You have or have had some minor financial problems
  • You can’t produce the financial reports lenders require for a line of credit

At Pay4Freight, our preferred financing method is freight factoring. Many of our clients in the trucking business find that it’s an effective way to maintain cash flow while seeking and accepting jobs on load boards or from contract clients. Take a moment to explore the programs, services, and resources available from Pay4Freight.