The economy is unpredictable, and the demand for certain products and services fluctuates for many reasons. It’s crucial to manage business finances effectively, especially in the early stages of company development, to avoid bad debt. This is money you are unable to recover, typically from a customer not paying its balance.
Warning Signs for Bad Debt in Trucking
Bad debt can quickly add up and slowly chip away at your company’s financial security. With that in mind, let’s begin by exploring some signs that indicate your trucking business is likely to have higher levels of bad debt.
Unresponsive Clients
It’s one thing for you to get the voicemail of a client once in a while. However, if it seems like they are avoiding you left and right, this could be a red flag. If a client had the funds or a plan to pay you, they would speak to you directly to avoid any potential misunderstandings. Not to mention, putting a stop to all your annoying phone calls. While we all know that the owner of a business can get busy, if you just can’t get a response, it may be time to send their account to collections. Furthermore, if the financial situation is urgent, you may want to consider working with an invoice factoring company like Integrity Factoring who specializes in advancing your company the money and working with your client to collect payment.
Repeated Excuses
Owning a trucking company requires flexibility. While you can be a bit forgiving if a client forgets to pay or is a few days late, this may be a red flag of bad debt if it keeps happening again and again. While you may think you’re helping a client out by extending the time for them to pay, you could be putting your own business at risk if it’s a frequent problem. Remember, you need to keep your business afloat and pay yourself. In order to maintain credibility and minimize the time between invoicing and collection, it’s important to be firm on your payment terms. If a client is consistently missing payment deadlines, it might be best to send them to collections and stop working with them.
Change of Ownership
Last, but not least, a change of ownership for a corporate client is another red flag of bad debt. If a corporate client undergoes a major change in ownership, they may not have the full history of that company’s past debt. Even worse, if they do, they may not feel any obligation to honor it. Instead of waiting to see if they are going to pay, you may want to send them to collections or hire an invoice factoring company like Integrity Factoring to collect payment while providing you with the funds you need in the process.
How Invoice Factoring Helps Reduce Bad Debt in Trucking
Invoice factoring, though typically used to accelerate cash flow, can also be a useful tool for avoiding bad debt. Factoring is the sale of your accounts receivable to an invoice factoring company at a slight discount.
Customer Credit Checks
As part of the process to begin factoring, your factor will run credit checks on your customers. This makes it easy to make informed decisions about who to extend credit to, as you learn which customers are not only likely to pay their balances in full, but also pay in a timely manner.
Faster Collections
Because factoring companies manage the collections process for you, and typically have processes in place that make it faster and easier for customers to pay, you’ll typically see faster turnaround on payments as well. Given that the longer a balance remains unpaid, the less likely it is you’ll be paid at all, factoring helps reduce bad debt through faster collections, too.
Non-Recourse Factoring
Additionally, you may be able to leverage non-recourse factoring. In a non-recourse agreement, the factoring company agrees to absorb the loss when a customer doesn’t pay a balance in specific situations.
The Difference Between Recourse and Non-Recourse Factoring
When factoring unpaid invoices, trucking companies typically choose between recourse and non-recourse factoring. Understanding the difference between these two types of factoring is essential to managing the risk of non-payment and protecting your working capital.
With recourse factoring, your company remains responsible if a client fails to pay the invoice. If the invoice amount goes unpaid beyond the agreed period, you’re required to either repurchase the invoice or replace it with another of equal value. This option often comes with lower factoring fees, but the risk of bad debt expenses is retained by your business.
In contrast, non-recourse factoring means the factoring company assumes the risk in specific cases, usually when a customer becomes insolvent. While the cost of factoring may be slightly higher, the factoring company’s fees include that additional protection. This makes non-recourse agreements an attractive option for trucking businesses dealing with new clients or accounts with uncertain credit histories.
Choosing the right factoring arrangement helps you maintain control over cash flow without exposing your company to avoidable bad debt.
Strengthen Your Trucking Business with Invoice Factoring from Integrity Factoring
While dealing with bad debt isn’t easy, you should always understand that there are options out there to help. Invoice factoring provides trucking companies with fast cash flow and can help reduce the risk of bad debt as well. For more information about the invoice factoring services we provide, contact Integrity Factoring by filling out our online form.
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