FACTORING

Factoring is no different than a payday loan. You are essentially paying them a portion of your earnings for the ability to have cash in hand right now...and I just don't see the point in doing that.

If you decide it is something you want to do, though, make sure you read the contract thoroughly. Heck, have a lawyer look it over and explain anything you don't understand. Some factoring companies will front you the money, and then demand repayment if the customer does not pay them. Other factoring companies will pay, then if they don't get paid it is their loss....but those types are typically going to have final say in whether YOU haul the load or not...so it's one extra place you need to check each and every load before you can accept the load. Some factoring companies will require you use them for EVERY load...meaning every single load you haul, they will be taking their percentage from the total bill. Also, some of these contracts aren't the easiest to get yourself out of if it just isn't working out the way you had hoped. MAKE SURE YOU READ AND UNDERSTAND ALL OF THE FINE PRINT!!!

 

Seach the forums for factoring. Lots of good information about it in other threads. I don't use it and have concerns about the costs. So if you use it, try and get off of it as fast as possible. When you see 5% that is not APR like you would see on a CC or home loan.

Would you take a car loan out at 60% APR? That is what the 5% works out to.

That is a flat fee to borrow money for what amounts to 30-days or so. Not counting all the little fees that add-up fast.

Look for posts by RedForeman. He is one of the few that has read the contracts and understands all the little gottchas.

 

There is a lot of brokers that have their own system of quick pay most charge between 1.5-3% and there are a few that dont charge try to negotiate the 3% in your rate and wait til you have your rate before you tell them you want quick pay You can do this to get started if cash is low and fade away from it once you have income coming in. factoring company have tricky contracts and wont factor all brokers

 

Another twist to add to PlumCrazy. I have asked for them to throw in QP for the companies that offer it. I'm about 50/50 on it but never as a way to make a bad rate better. Good rate first then ask for free QP.

 

There's a charge for everything. No different than the many quick pay options the brokers offer. Depending on who you deal with, factoring isn't just a payday loan. With a legit company, they are also doing your collections for you and providing cash flow predictability. Heck, it's worth a point or two to me just to not have to call and hear brokers lie, check the mailbox, and run out to deposit checks. When I send off a package, it's two business days to the money and I don't leave my seat. Every time.

You should look for the following:

1. A rate you can deal with. Seems the going rate is 5% for non-recourse (broker goes bankrupt, you keep the advance). Some offer graduated rates that start small and increase with days to pay. Some offer full recourse (you pay back if invoice is uncollectible at some number of days).

2. Know your fees to do apples to apples comparison. Do you have to overnight original bills? Is there a handling fee? A fee to withdraw money or use their fuel card?

3. Invoice accounting - how easy is it for you to see what's happening with your invoices. How does the factor communicate with you and your customers? How much money are you floating? What has been collected? What is passing 30/45/60 days?

4. Perks - Fuel discount? Service deals? Tires and parts?

5. How many days and in what way do you get your money? What are your options? Some use fuel cards, ACH, bank wire, etc. Find out time and cost for any options.

6. How do they handle charge backs? Is there a reserve account? Do you get any warnings? Will the factor work with you to collect when there's a claim?

7. How much must you factor? Are you signing over all of your receivables? Just certain customers? Can you choose per invoice? Can you have them invoice but not factor?

8. How hard is a divorce? Someday you may be in a position to stop factoring or decide someone else has a better deal. What's that going to cost and how will that impact your business and cash flow?

And watch out for the following:

1. Read the fine print. If you don't read good, hire someone to read it for you. In my shopping, the best example was one that buried an unlimited power of attorney in the fine print. Seriously. If our business relationship had gone sour for any reason, they could take title to everything I own. When I pressed the issue, my best buddy sales guy turned into a screaming lunatic accusing me of being a crook. Right before I hung up on him. Beware.

2. Non-recourse can be a red herring. A bad broker can jam you up with your factoring company over claims. It could be missing freight, late fees, reimbursement charges, anything. You need to be extra careful with your invoices to make sure the broker will pay in full without a doubt.

3. Watch your receivables. Your factor will do the collections legwork, but cannot resolve claims. You still have to monitor days to pay and step in when a broker is running a little late so you can avoid a chargeback. I had one that waited until 55 days to bring a claim to my attention, even after I had called them twice before in the 10 days before that. So far I've had to step in on 2 out of 30 invoices. Both of the ones I had to do something with were resolved and paid. It's not an entirely hands-free process. Your factor can be the 800 lb gorilla for collections only if you have your sh1t in one sack to begin with.

4. Watch your fees. Factors charge for everything. Everything should be transparent, trackable, and reconcile.

5. Ask lots of questions. Write them down if you have to. Every question you don't ask is likely to cost you money.

6. Don't factor or even quick pay if your life depends on it. Even if you're getting fast money on invoices, it can't be your only money. Borrowing can be a powerful tool as well as slippery slope. For that reason I flatly refuse to accept any advances from brokers. I feel like fuel advances and the like are dangerous. Maybe I'm a hypocrite when I say that, but the fine line to me is that factoring is borrowing against a debt owed to me versus a loan against work I haven't done yet.

 

Excellent comments, RedForeman. Despite being the owner of a factoring company, I could not have provided a better description of how factoring works. The only things I would point out is that in my opinion, Quickpay is more expensive than factoring and not all brokers offer it, so an o/o that has cash flow problems may be better off with factoring. Secondly, I would suggest that non-recourse factoring can be expensive because you're paying for credit insurance on every invoice...there might be other ways to explore.

Kimbosa, I'd be happy to answer any questions you may have on factoring. If you'd like me to review your factoring contract, I could definitely do so. You could also ask around to get the names of other factors recommended by people in this Forum. Do your homework and I wish you good fortune in your endeavours!

 

KeyFactor, I appreciate your comments but not sure how QP can be more expensive. Sure, I have seen some that want 4% but bigger outfits are 1.5% with limited to no additional fees. And while I am not in a position to need to factor, I often take this option because I do not have to worry about tracking down invoices.

 

BigBadBill,
You sound like you have a good rate, but you have to admit that it can be viewed as 18% per annum using your APR analogy (I don't look at it like on an APR basis because factors provide the collection and credit analysis service that a bank doesn't offer). Whether or not a factoring or QP rate is good depends on how much they charge for the amount of time the money is advanced. If you invoice today and they charge 1.5% to QP next week versus normal payment of 30 days, then you're getting your money three weeks earlier for only 1.5%...a very good deal. On the other hand, if you're only saving a week, it's not so great. Some brokers in my area charge 4% QP to save two weeks...that could end up being much more on a monthly or annual basis. These brokers don't even offer QP for all their customers...only the ones that pay quickly. I can usually beat QP rates, if I know what I'm up against, but it's hard top throw out a quote without knowing specifics. Anyways, the point I'm trying to make is that my comments were made in reference to what brokers in my area charge for QP.