All Transport Companies need positive cash flow for growth
A positive cash flow is the life blood of any transport company. Without enough cash to keep on growing, more than 80% of all new transport and logistics companies fail within the first few years.
The transport industry is dominated by several very large companies serving many equally large clients such as retailers, manufacturers and mines. Payment terms are dictated by the size of the client: the larger the client, the more negotiating muscle it has when talking payment terms to its suppliers.
In a depressed economy where many businesses are fighting for survival, large clients can easily stretch payment terms to 60 and even 90 days from statement.
This means that the transport company must often pay for expenses such as diesel, wages, maintenance and finance charges on a specific load long before it actually receives payment from its clients.
Large transport companies with a lot of working capital and bank facilities can usually afford to wait for payment.
The real problem lies with the smaller transporters – there are many companies with only a few trucks on the road which do not have the working capital, bank facilities or negotiating strength to ride out long payment terms.
These smaller transport companies are often sub-contractors for larger transporters, who simply pass on the problem of delayed payment to the smaller guys.
The result is that small, growing transporters need very strong cash flow and enough working capital to survive – they have to pay for running expenses up to 90 days before being compensated for their services. This places enormous cash flow pressure on them.
The easy way to resolve this problem is to pump enough working capital (in the way of cash or bank facilities) into the transport company. Unfortunately this solution is not practical, because small growing companies can usually not offer the security required by external investors or banks.
“Once a business has cash flow problems, you can forget about bank funding”, says Philip de Bod, COO of CapX Finance. “Unless you have access to other cash resources or security, your business may be doomed forever.”
Invoice discounting provides a very effective solution for this problem. In the USA, for example, there are several financiers who only fund transport companies, often at various stages in the supply chain. Many of them use some form of invoice discounting.
The mechanics are simple: Once a client has signed off on a particular invoice, the business sells (“discounts”) the invoice to the financier. The transport company receives the discounted amount immediately, while the financier collects the full invoice amount from the client on the due date.
Invoice Discounting Steps:
The result is that the transport company has converted its outstanding debtor into cash, allowing it to keep on growing the business.
A financier will focus on the credit standing of the client/debtor (i.e. the company paying the invoice) before agreeing to discount a particular invoice. The discounting cost is comparable to a typical discount allowed for cash payments.
To arrange invoice discounting is not a lengthy process nor does it involve a huge amount of paperwork. Once an application is submitted for the first time, it should not take more than a couple of days before payment can be made. Subsequent payments should take a few hours.
In a nutshell: Invoice discounting can save a transport business from disaster and provide the financial basis for solid growth.