Trucking company owners operate on tight margins. There are only so many hours in a day, and you have to be competitive. You can’t take on more work if you’re already on the road for the maximum number of hours allowed. Instead, you must find ways to profit through low operating costs and charge the highest possible per-mile rate without pricing yourself out of the running.
Optimizing cash flow and carefully managing expenses like insurance rates, fuel costs, and truck maintenance is key to staying profitable. Driver and office worker wages also have to be carefully managed. Freight factoring can help you with some of this, specifically through dynamic discounting.
What Is Dynamic Discounting?
Dynamic discounting is a strategy that uses flexible financing to offer discounts for early payments. If a broker or shipper pays 10, 15, or 20 days early, different discounts are offered. It’s an incentive that benefits the broker or shipper and benefits you by ensuring you’re paid earlier.
Understanding the Mechanics of Dynamic Discounting
Here’s a quick look at how dynamic discounting works. You offer your broker a 3% discount when an invoice is paid within 10 days, 2% if it’s paid within 15 days, or 1% if it’s paid within 20 days. They save money, which makes them want to pay as soon as they can.
You get paid faster, which helps you stay ahead of your expenses. Instead of waiting a month to get paid, you have the money available for fill-ups, truck repairs, and other expenses. You avoid late payment fees, overdraft fees, or dings to your credit report.
Dynamic discounting works well with freight factoring. With freight factoring, you get paid the same day or soon after, so you get money quickly. There’s a risk of having to repay if your client doesn’t pay on time, but a non-recourse arrangement offers protection against those situations.
Incentive to pay early ensures you get paid quickly, as does a freight factoring arrangement. For clients who do not take advantage of these discounts, you can send those invoices to a freight factoring company and still get paid early. It’s a win-win for everyone.
Freight Factoring and Dynamic Discounting – The Main Benefits for Trucking Businesses
The benefits of dynamic discounting and freight factoring are numerous and do a lot to help your business’s financial health.
1. An Advantage Over the Competition
Dynamic discounting gives you an advantage over the competition. Consider it from a broker or shipper’s perspective. Company A and Company B both charge $2.50 per mile. Both have stellar reputations.
However, Company A provides a 3% discount when invoices are paid within 10 days of receiving them. Company B doesn’t offer a discount. The client would save money choosing Company A as its transportation partner.
2. Faster Payments
Both dynamic discounting and invoice factoring provide faster payments. You get paid quickly, which gives you much-needed working capital for running your business. You no longer wait months to get paid. And that’s less stress, plus easier access to the money you need to pay bills on time.
3. Financial Freedom
When you have money coming in before it’s expected, you gain financial freedom to pay bills early. This reduces the interest you pay on short-term installment loans, such as a credit card. You’re also keeping up with your bills, so you don’t worry about late fees or overdrafts. It’s liberating to know money is there when you need it.
4. Higher Credit Rating
Because you can pay bills on time and aren’t reliant on your business credit cards, your business credit score increases. Over time, this means lower interest rates when you do need to take out a loan to purchase a new truck, buy a new building for your company’s headquarters, or grow your company from an owner-operator truck driver operation to one with several trucks in your fleet and a team of drivers.
5. Improved Risk Management
You don’t always know when a broker or shipper is going to shut down or file for bankruptcy. They may not make you aware that they’re struggling. Things have been going well until this month’s payment, which never arrives. Suddenly, you learn they shut their doors and are gone. That leaves you out of the money you’re owed for work you did weeks ago.
Freight factoring offers a way to manage the risk. A non-recourse arrangement provides you with protection from an unexpected closure or bankruptcy.
5. Less Office Busywork
Generating invoices, chasing late payments, and processing incoming payments takes time away from the other responsibilities your office workers have. Instead of spending hours on the phone trying to get a client to pay them, they can spend time planning routes, looking for more loads, and marketing your company.
When you arrange services with a freight factoring company, they take over the invoicing and collections for you. All you have to do is upload the invoices to your bookkeeping software when you want. The rest is done for you.
6. Less Reliance on Short-Term Debt
If you have a strong cash flow, you’re less likely to rely on a credit card and other short-term loans. You save money on interest each month.
7. Reduced Operating Costs
When you’re getting paid early, you pay your bills early. You can pay for maintenance before it reaches an urgency, which lowers your costs. A well-maintained engine uses less fuel and oil. You also avoid catastrophic damages like a blown tire or blown engine when things are being tuned, replaced, and maintained correctly.
Freight factoring helps with reduced operating costs, too. Fuel discounts are often part of the arrangement. You save money on every gallon of gas or diesel you put in your truck.
8. Stronger Business Relationships
Offering a discount to your customers is a good way to improve business relationships. You’re providing them with a way to save money, even if it benefits you. With happy clients, they’re more likely to tell others about your company, and that boosts your word-of-mouth referrals, which brings more business.
9. Stronger Cash Flow
The stronger cash flow is key to both dynamic discounting and freight factoring. You have money coming in throughout the month. There’s no more sending an invoice at the beginning of the month and hoping it’s paid before the month ends. This makes it much easier to successfully operate a trucking company.
Partner With an Expert in Freight Factoring
The benefits of dynamic discounting are plentiful, and freight factoring arrangements add to it. You do need to carefully weigh your options on choosing the right partnerships. Once you’ve signed up for freight factoring and offered discounts to your steady clients, make sure you track the effectiveness to ensure it’s working as you expected.
Search for freight factoring companies and get dozens of results. How do you choose the best freight factoring company to pair with dynamic discounting? How do you know who is best when there are so many choices? Do your research and compare factoring companies:
- Experience in the trucking industry
- Years in business
- Feedback from current and former clients
- Factoring rates
- Clarity regarding the contract terms
- Additional services offered
Dynamic discounting offers a powerful and flexible financial tool that can help make your trucking business a grand success. With a steady cash flow, improved relationships with your clients, and heightened risk management, you’ll succeed in the lean times.
Saint John Capital has decades of experience in the trucking industry and freight factoring. Reach us to learn more about our low freight factoring rates and fuel discounts.
