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

I understand what ironpony is trying to say, either way you slice it , its 5 per cent gone whether its interest , fees or whatever you decide to accept it as.

many brokers and companies charge 2 per cent to get quickpay. 2 per cent here and 5 per cent there adds up over time. on 200,000 revenue , you pay 10,000 a year in factor fees at 5 per cent.

I think ironpony 's main point is watch those little percentages , they add up to big percentages.

one other thing , if you have ever been taken for several thousand dollars in unpaid freight bills, that 5 per cent will seem awfully cheap to avoid that.

 

Just stumbled onto this thread. I considered getting my own authority at one time. I understand and agree with what Gman says. With factoring, you are not just paying for the immediate cash. Using nonrecourse factoring, you are paying them to assume all responsibility of collections, defaults and recievables. In fact, if I got my own authority tomorrow, I would very likely use a non recourse factor exclusively. I dont like paperwork...or keeping up with who owes me money, who paid and didnt pay for what. I would let them earn their 5% doing the billing/collecting/keeping up with it all while I concentrate on finding and hauling freight. Whether you spend 30 minutes/day or 2 hrs/day messing with that stuff, it is time you are not driving or looking for freight. As a solo o/o with own authority, time is precious. Non recourse factoring would be a great way to deligate that task away...cash flow and risk management just being an added benefit.

 

It is good to see you, Arky. Let's look at the real costs of factoring. Let us assume you are doing business with a factor who charges 5% for non recourse. Your volume is at $10,000/month, for easy figuring. In a year your volume or gross revenue will be $120,000 ( $10,000 x 12 months = $120,000). If you factor all of your receivables for the year you will spend $6,000 for factoring your receivables ($120,000 x .05 = $6,000). Even though you are paying 5% per month to factor, at the end of the year you are still only spending 5%, not 60%. I understand what you are trying to say, but it is not an accurate picture. Let's also look at having the cash flow. Unless you have significant amount of cash in hand, you may wind up sitting until your customers pay your invoice, unless you factor or find a way to access more cash. This is an industry that requires a lot of cash to operate. Most of your money runs up the stack. Running on your own money will require you to finance your business for 45-60 days, providing everyone pays as agreed. Even if your customers pay in 30 days, it still takes time to do the billing and for the mail to get to the customer and for them to write the check and the mail to deliver it. If you are not home or have someone to check your mail and make deposits, the wait time could be even longer.

There are costs associated with any business. Factoring is just another expense. Factoring could mean the difference between running and sitting. It could enable you to grab that good paying load you could not afford to take otherwise. Factoring could also help should you have a breakdown. They won't advance money without having your receivables, but if you are factoring and breakdown, you would have your money in hand without having to wait for your cash so that you can pay for repairs. Let's look at the rates. I will use $2/mile as the rate. If you do your own billing and wait for the customer to pay, then you get to keep all the money, providing you get paid. If you check out your customers prior to hauling for them, you should not have to worry much about getting paid. If you pay the factor 5% on that $2/mile rate, you will discount the load and receive $1.90/mile rather than $2/mile ($2.00 x 0.05 = $0.10 discount). ($2.00 - $0.10 = $1.90/mile) If you change the way you look at it you will be making $1.90/mile rather than $2/mile. The cost of factoring could be included or added to the rate you charge your customer. Factoring can also help you to sit to wait for better paying loads instead of running to keep up the cash flow.

Again, I am not trying to sell anyone on factoring, but it is an option that can help build your business. If you choose to factor I would only go with one that doesn't require you send them all your receivables, since most brokers offer a quick pay option where you only discount the rate by 1 1/2 - 2%. Using the quick pay instead of the factor would save money while still being able to get your money turned quickly. Having the cash flow could enable you to haul an extra load a month or more. That is something you would not have been able to do without having the cash flow. No business can survive without cash flow. How much more revenue could you generate by using a factor and having the cash flow? That is a decision everyone must make for themselves.

 

Hello Gman....100% agree. There is a lot more to consider than just the cost. Everyone is entitled to their own opinion, but I personally see a good factoring policy to be a very integral part of a successful operation. It's just a tool in the toolbox. Some will never use it, some will use it sparingly, while others will wear it out and go get another one.

 

seven oaks capital llc out of baton rouge,la is cool. They pay on the same day mostly by noon when they get the originals...sorry but i dont think they offer fuel advance. they will load your final pay on your comdata fuel card. Im using TBS now to see what the difference is because they offer fuel advance. was much happier at seven oaks capital.

 

verry goooooood! great teaching, gman

 

That isn't how interest rates work. Now if on January 1 you hauled a load paying $120,000 on December 31 & your factoring company agreed to give you $114,000 on January 1 -- that would be a 5% annual rate since you would have use of their money all year.

But they are charging you 5% per month. Think of it like this: They loan you $9,500 and after 1 month you give them the $10,000 that you just got paid. But then you turn around and have them loan you another $9,500. So in reality they are loaning you $9,500 once and you are paying them $500 every month to maintain that same loan. So at the end of the year you've paid $6,000 for that $9,500 loan.


And exactly like payday loan places, factors obfuscate by emphasizing solving your "short term cash flow problems." Really it is simple: manage your personal/business finances and you'll have no problem obtaining a legitimate $10,000 loan at a 5% annual rate. Instead of $500/month in interest you'll pay $43. But a funny thing happens -- when you learn to manage your money you won't be running into those "short term cash flow problems."

 

Maybe this will help people get their heads around the difference between interest rate and factoring. The are not charging you interest they are charging you a fee. That fee happens to be represented in the forum of a percentage. But they could just as easily say they are charging you $5 per $100.

But if you get a way from those factoring companies that advertise all over the place and find a nice smaller, service focused company they will be a collections partner, help with invoicing and use their resources to help you make better credit decisions. And they don't charge 5%. You should be able to get into the high 2's.

 

I think many on this thread are missing the point of factoring. It is a cash flow solution that can support higher levels of growth than any other. IMHO, it should be used for growth situations, where associated costs are more than offset by incremental sales that couldn't otherwise be supported. If there is no growth and you qualify for a loan, take the loan, but if there is growth and you want to dedicate your resources to hauling loads instead of managing your receivables, you should consider factoring. Think it's a crazy argument? We began factoring for a transport company out west 5 years ago at $30K in monthly volume...they're now up to $750K monthly. The bank recently approached them for a $150K line of credit, but they are getting $700K from us, so the bank line doesn't even allow them to support their current level of sales. They politely declined the bank's offer.

I would even take this argument further by saying that every hour spent on the phone making collection calls is an hour that could be better spent meeting new customers and hauling other loads. I understand the need to compare costs, but to boil this all down to a rate that is clearly not done on an "apples to apples" basis seems inappropriate at best. Don't let your desire to analyze costs lead you to make a flawed business decision that ignores the bigger picture.

 

I would accept that thesis if they were solely handling your billing and you still got paid in 30 days. But they are charging interest; they are giving you money now in exchange for them receiving more money later; present value vs future value -- that is the foundation of finance:



PV = FV / (1 + r)^Y

which can be rearranged to solve for rate: r = ( FV / PV ) ^ ( 1 / Y ) - 1




So even a 2.75% "fee" to get your money 1 month early is an exorbitant interest rate:

r = ( $10,000 / $9725 ) ^ ( 1 / (1/12) ) - 1

r = 39.74% apr




Where you might make a compelling case is if you say "of that $275/month, I'm paying $200 for them to be my billing agent and $75 to get the money now." If that is the case, then your rate would be:

r = ( $9,800 / $9725 ) ^ ( 1 / (1/12) ) - 1

r = 9.66% apr


If that is truly the case and everyone involved understands, I have no problem with it. But the vast majority of people are using factors just to get their money now which means they're paying 40, 60, 80% apr's.