Factoring companies: which are good? What to look out for?

You're confusing an Annual Percentage Rate with short term interest. Factors charge short term interest, and hope that you confuse it with an APR... so they can fleece you out of your money. You need the math class sir.

$20,000 x 60% = $12,000

It's cheaper to finance it on the worst credit card you can possibly obtain.

 

Factoring rates can be high, but consider it a cost of doing business. The factor assumes the risk, providing it is non recourse. If it is recourse factoring, then rates could be lower, depending on how long it takes the broker or shipper to pay them. There are alternatives to factoring. If you have good credit then you may check with your bank about securing a line of credit. Rates will be much lower, but you will assume all risks and responsibilities for checking credit, billing and collecting your money. There is usually an annual fee attached to a line of credit, but rates are much less than using a factor. With factoring your credit doesn't come into play. It is your customers credit that the factor considers when deciding whether they want to accept the receivable. With recourse factoring, the factor doesn't accept responsibility for the receivables. They advance money using the receivables. If the account doesn't pay within a certain time (often 60 days), then the factor charges the money advanced back to you.

One think that i used my old factor for was to check to see how a broker or shipper paid. I could go in and check the aging and when the factor was paid. If the broker or shipper was slow pay, then I may not want to continue doing business with them. With the arrangement that I had with my factor, I only sent them the invoices that I wanted. I could continue billing some accounts myself. Some factors require you to send them a minimum amount of receivables each month. Other may require that you send them all your invoices. In my case, i had one broker that would pay me the day he received my bills and invoice. Another would pay me within 3-5 days. There was no reason to factor those accounts. Had I been with some factors, I would have been required to send the factor those receivables along with others that might take longer to pay.

It is difficult to use an annual interest rate when using a factor. If you only consider the rate as interest and you pay a non recourse factor 5%, then you could say that based upon that rate, you would pay an annual rate of 60%. But, that can be deceiving. You pay for credit monitoring, billing, collections, etc., in the rate. You also are no longer assuming any liability should the broker or shipper not pay. A non recourse factor should not charge back anything unless there was a problem with the load, such as a claim. I never had a single problem with anything being charged back to me. With factoring you are not using up your available credit lines. Factoring is not a loan. You are selling your receivables to them for a discount. I have only lost about $1,200 in the last 15 years or so due to not being paid by a shipper or broker. There are some who seem to have more of a problem collecting their money. I always check credit on any new company that I have not done business. I am very careful to whom I extend credit. If they don't have good credit then they either pre pay or COD or we don't do business. Usually, I prefer to not have to deal with COD. Factors do fill a need. Not everyone pays their bills in a timely manner. There have been some large shippers and broker who have gone bankrupt. If the factor purchased the receivable, then they lose their money. If they charge 5%, then they would need to collect from 20 brokers or shippers to break even from their loss of one bad receivable.

If you cannot afford to pay 5% for non recourse factoring, then perhaps you are hauling for rates that are not sufficiently high enough. In business, it is not uncommon for major manufacturers and suppliers to offer discounts for early payment. A company that I was once involved used to offer a 2% discount if the account prepaid or would pay within 10 days. We collected over 30% of our money in this manner. At the time interest rates were over 21%, so it was well worth the discount to keep our cash flow moving. We had strong growth and it can be challenging to keep up with rapid growth unless you have a line of credit or access to capital. There are costs to doing business. Factoring is just a cost of having your cash flow going without using up available lines of credit or assuming the risk of extending credit.

If you have a good cash reserve, you may not need to use a factor. Since most brokers offer quick pay for a discount on the bill, it makes using a factor less attractive. My guess is that many of those brokers who offer quick pay are factoring their receivables and passing those costs along to the carrier in the form of a discount rate.

 

Well that's the point. 5% short term interest that works out to 60% APR isn't the way to do business. It's the equivalent of living your life off of payday loans for the someone pretending to be in business. If you have to sell all of your bills to meet the next fuel payment, IMO, you're in over your head.

 

I am not saying that factoring is for everyone, but there is more involved than just giving someone your receivables and them writing you a check. If you had to hire someone to do what a factor does, you would be spending money and it could easily be as much or more than what you pay the factor. I have been in a position where my business was growing so fast that it was difficult to keep up. Growing businesses need cash flow. You cannot always borrow enough capital to finance your growth, especially starting out. There are instances where a line of credit may not be sufficient or practical for some who need financing to grow their businesses. You may give up 5% (depending on the factor), but could gain 20% or 50% in revenue that you would not have been able to get without the cash flow. That would be a net gain.

 

So 95 % is worse than 0%? You dont seem to understand the real reason for the factor, security. Guaranteed payment of 95% compared to 0%. How about these? http://www.thetruckersreport.com/tr...-forum/245834-mega-trux-owed-me-28-875-a.html If they had a non-recourse factor, they would be moving on with there business. With the rates I am getting for trucking, I dont even notice the 5%. The way it is for me, I have 0 expenses on this this truck and trailer at the end of every day. All payed off, in great shape ready to haul. If at any time I dont want to drive, I am free and clear with my money in hand. No waiting for anything. No long term interest, billing, chasing, getting to the bank. The real smart way to go about it is, it pays great, or I am done. Move to something that is paying. Dont think that you have all the answers. I dont, just state your opinion and let some one decide for then selves.

Oh and I forgot, You are good at basic math. You just dont know how to figure financing. The 5% does not accrue.

 

It does if you continue to rely on it month-over-month. Of course, if you have your blinders on, can't remember what you did last week... then I can understand your point of view.

 

If you factor 10K a month (and the average DTP is 30) then you "borrow" the same 10K each month over and over. Not 120K.

 

And you pay 5% of that $10k each month in short-term interest. $10k x 5% = $500, or you're paying $6,000 to continue "borrowing" that same $10k on a monthly basis over the course of a year. That's ($6000/$10,000) x 100% = 60% APR.

It's so much nicer to pretend that it's only 5%. That's what the vultures, err... factors are counting on. The point is that this is not cheap money, but in fact VERY EXPENSIVE money. A bad credit card is cheaper, and a loan shark would be embarassed. If this is what you have to do to finance your operation, then it's what you have to do. The key is to understand that this is very bad business, and whatever perks that the factor offers to hide this (credit checks, etc) can be obtained elsewhere. OOIDA will do your credit checks.

On a continuing basis this is a very bad business practice, and anyone stuck in this kind of cycle should recognize it as such. Use a factor to protect yourself from a questionable shipper? Sure, but why do business with a crook when there are plenty of reputable shippers out there?? The best thing one can do is to ween themselves off of the "easy money"... do the hard work and build your finances to the point that you don't need it.

 

Thanks again for your constructive input on this topic.

 

You're welcome. Remember on the backswing of that bat, not to smack yourself in the back of your head...