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

A number of years ago I looked around for a factor. Some were recourse and others were not. Some had minimums or monthly fees. You need to read all of the paperwork, especially the fine print. I finally settled on D & S. I was one of their earliest customers when they first started out. Things went well, for the most part, until about a year or so ago. I received an addendum from them stating that they could go into my bank account and take money out if they didn't get paid. D & S is a non recourse factor. That means that they can't go back on you should the broker or shipper fail to pay. The addendum basically allowed them to charge back to me any receivable that didn't pay them. Now, to my knowledge, I never sent them a receivable that didn't pay, but when I am paying for non-recourse I don't expect to have something charged back to me. I asked them if they planned on lowering their fees should I sign their addendum and was told that they had no plans to lower the 5% fee. I immediately cut ties with them. I had a friend who had something charged back to his bank account without any notice. This was prior to my cutting ties to them.

I always checked credit before sending any receivable to D & S. There was usually little risk for them on anything that I sent them. Those factors who do recourse have lower fees, but they usually vary according to how long it takes the broker or shipper to pay them. If you have those who pay quickly, the fees can be lower than a non-recourse. I have spoken to some who charge as much as 8% for non recourse factoring.

You are better off if you have a revolving line of credit with your bank or stick with those brokers who offer some sort of quick pay. With any of the quick pay brokers, you can expect to pay from 1 1/2-8%. I would not pay more than about 2% for quick pay unless I was really in a bind. Offering a discount for early pay is common with most manufacturers. I was involved with one manufacturer at one time that offered a 2% discount if the invoice was paid within 10 days. About 30% of our customers took advantage of the discount. That can really help with your cash flow.

There is a recourse factor out of Memphis, TN called Banker's Trust, I believe. I don't know much about them, but they seem to have a decent program. Rivera (?) Financial is another that does a lot of factoring for trucking companies. Transportation Alliance Bank is another that caters to the trucking industry and offers factoring. Some banks offer factoring, but they often have high minimums. Some want a minimum of $250,000. The advantage of using a factor is that you don't tie up your resources or reduce your available credit since thy ar lending money on the broker's or shipper's credit, not yours.

 

First, ugly truth about non-recourse is that when they charge you back for a reason that is allowed in the contract they fully expect that you will not be able to afford to fight them to get your money back. So people are paying anywhere from 2-5% extra for "insurance" on non-payment for something that the company does not plan on honoring. And if you do the math in a typical market you have to see what that is costing vs what you could lose if an account doesn't pay. You may be surprised that it is cheaper to go recourse.

Now, this year is going to be a bloodbath in terms of broker non-payment. Many established, smaller brokers are going to fold because they can't qualify for the new bond and a percentage will just walk away with $100,000's owed to trucking companies. But traditional credit monitoring systems are not designed to predict this and non-recourse are likely to go under from this.

Factoring or not, time to tighten you credit standards to brokers with $10k bonds. This is going to get ugly. Thank you TIA and OOIDA (those two getting in bed together should be considered one of the signs of the coming apocalypse).

 

Bill, I remember when you were considering going the factoring route a while back...I hope this is not a description of your first-hand experience with non-recourse. I'm pretty sure it works well for many. Your advice is good, though...buckle-up, we're in for a ride!

 

I actually work for a factoring company currently. Factoring is definitely not for everyone, but if used correctly in the right cirumstances, it can definitely provide much needed assistance to those who need it.

Unfortunately, there are some unethical practices used by certain factoring companies that give the entire industry a bad name. Truth is there are a handful of legitimate factoring companies that offer full disclosure of contract and ultimately provide a consistent honest service.

 

STAY WAY FROM FINANCIAL CARRIER SERVICES OUT OF NORTH CAROLINA VERY BAD NEWS IF SIGNED UP WITH THEM AND NEED TO CANCLE YOU WILL NEED TO PAY 1000$ or one thousand$ ++ to get relase letter from them SHARKS I SWEAR TO GOD THEY ARE VERY BAD NEWS !!!!

 

Nope, looked at buying a factoring company. I think I would have had more respect for myself had I become a pimp.

 

You are much better off using quick pay that is offered by most brokers than using factors, as long as the discount rate isn't too high. I don't know that I agree with your assessment, Bill, that a lot of brokers will take off or close their doors and leave carriers holding the bag for thousands of unpaid freight bills. I greatly disagreed with OOIDA and others who pushed for a higher broker bond. I do believe there will be unforeseen repercussions from that decision. This legislation will greatly reduce competition and not be in the long term interests of truckers or carriers. OOIDA got involved when a handful of independents cried to them when they didn't get paid. Had these people bothered to take the time to check credit from those brokers prior to taking the load, they would not have had a problem getting their money. Most businesses will lose some money every now and then, but some of these people had several brokers who failed to pay them. In over 40 years, I have only lost $1,200 on a single load and I still believe it was more of a misunderstanding than the broker trying to beat me out of my money. I do take time to check credit and follow up. Some of these people want the government to protect them from every risk. This type of ill thought of legislation is the result.

 

Lol...should I get myself a big purple hat?

Joking aside...your quote of what I said is not accurate...the pimp reference is yours, not mine...please modify it because I don't want anyone thinking I agree with that statement.

I don't feel obligated to defend factoring, but it may help people on this forum to understand things from a factor's perspective. I don't believe all factors are bad nor should they be characterized as pimps. We offer an important service that helps companies survive and grow, if used properly. I used to work for a public company that used numerous types of alternative forms of financing such as securitization programs (essentially the same thing as factoring) and asset-backed loans. In the case of the asset-backed loans, they were very expensive, but because of our situation, we had to pay the price...that's life! Most smaller companies don't get this point...nobody is going to lend money to them at 4% because the risk of doing so is way too high. They don't think their risk is high because they feel they know their customers and have confidence in themselves, but the factor doesn't know them or their customers from a hole in the wall and we get burned all the time as a result of fraud, debtors that don't honour their obligations or clients that don't properly provide the goods or service for which they were engaged. It's a free market, so if there were better alternatives out there, nobody would use factoring, but the reality is that we're the only ones that will help in many cases, and I say that having been on the other side of the fence as a client.

At the end of the day, you have to do homework when choosing to factor or enter any other business relationship. When you ask for references, you should also ask how it was to deal with the factor at the end of the relationship...were they fair...did they charge extra fees. Everybody always focuses always focuses on getting the lowest rate and ignore the other important stuff. Sometimes, you just get what you paid for.

Just sayin'

 

Not "ALL" FCs lie, but they are in business to turn a profit just like every business should. Unfortunately, some unethical FCs give the entire factoring biz a bad name. Same can be said for shippers, brokers, carriers, drivers, and dispatchers that don't always operate with integrity. Doesn't mean ALL operate the same way.