Whether you’re operating long-haul or last-mile, one factor is crucial to transport industry success: healthy cash flow. It’s why transport and freight companies need solid financial partners in order to go the distance and strive for growth.
One option for improving your cash flow is exploring how to get a business loan from a bank. But a traditional loan has its limitations. The good news is there are many viable working capital alternatives that can drive your business to succeed.
Let’s begin by looking at some of the key challenges in the industry before reviewing available business funding options.
The industry challenges driving different types of business loans and funding solutions
In recent years, several challenges have significantly impacted the Australian transport and freight industries. Notably, volatile fuel prices and inflationary pressures on wages and operational costs continue to strain cash flow. Some persistent issues include:
- high operational costs to cover vehicle maintenance, repairs, road user charges, toll charges, insurance, vehicle parts, vehicle registration and driver training and accreditation
- Lengthy customer payment times with many businesses experiencing 30+ day payment terms
- limited ability to pass on cost increases. For example, only a small percentage of trucking businesses can viably pass on increased fuel costs to customers, according to the Australian Trucking Association’s latest research
Allan Howe, Octet’s Working Capital Solutions Director for Queensland, notes that the cash flow squeeze caused by these challenges makes reliable funding solutions, such as freight finance, so vital for industry success.
“Typically, there is a cash flow gap in any transport operation,” Allan says. “You’ve got fixed costs such as insurance, wages, licensing and permits. Then, there’s your ongoing variable costs like fuel, maintenance and repairs. To compound matters, you’re generally only getting paid by customers every 30 to 40 days. Transport finance is therefore crucial in helping you to cover the cash gap.”
The limitations of traditional funding and business loan options
Traditional funding options for the transport and freight industry include:
- Term business loans – usually in the form of a single disbursement that is repaid on a set schedule
- Lines of credit – providing access to a set amount of funds where required
- Bank overdrafts – offer access to extra funds when your businesses transactional account balance reaches zero
Businesses may choose between unsecured or secured traditional funding options, though many choose secured alternatives due to the higher interest rates generally associated with unsecured funding.
Allan says a major downside of traditional, secured funding options is that they tend to be property-backed, irrespective of whether it’s a standard bank loan, line of credit or bank overdraft. “As a result, many business directors use their own private assets as security to get funding,” he adds.
In addition to the risks associated with entangling personal assets with business assets, Allan cautions that traditional asset-backed funding options may have limitations for business growth.
“Property-backed traditional funding options will always be limited in their ability to release working capital to the business, and they won’t generally grow in sync with it. The funding options are only as flexible as the property’s value.”
Unlocking the power of trade finance and invoice finance for your transport business
Smarter, faster working capital funding alternatives to traditional bank loans are available. These include:
- A trade finance facility, which is a flexible business line of credit where your financier pays your suppliers immediately while you repay your financier over time.
- A debtor finance facility (also known as invoice finance) that enables a business to transform its accounts receivable into readily available cash. This process is sometimes referred to as freight factoring in the transport industry.
- A term loan that unlocks additional working capital to expand operations or acquire new assets by as part of a Debtor Finance or Trade Finance facility.
Allan says that unlike traditional business funding options, alternative working capital solutions are designed to be flexible to grow with your business.
“If you get a bigger contract, your revenue may increase by 25% overnight. Your balance sheet must be able to support that. Working capital solutions can support this growth faster than traditional property-backed financing, where your funds are often limited to the property’s value.”
Allan emphasizes that dissatisfaction with traditional financing options has led many transport and freight companies to seek more innovative working capital solutions, like Octet’s debtor finance, to fund their growth.
“Many transport businesses come to us after a traditional financier has given them a property-backed overdraft. They’re frustrated. They can’t take their business to the next level because they need to increase their overdraft from $1 million to $2 million. Yet with a property-backed overdraft, they simply couldn’t get any further.”
The solution?
“Octet can tailor a debtor finance facility to suit your business needs. For example, one company we worked with in the transport and logistics industry was able to get increased working capital via our debtor finance solutions, with their funding limit recently doubling, minus the need to use personal assets as collateral.”
Go further with Octet’s working capital solutions
Your transport business needs a trusted finance partner to power its growth potential. Explore Octet’s range of intelligent working capital solutions to discover which product is right for your business. Contact our team of working capital specialists today.
Disclaimer: These comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
