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

Don't piss away 5% when you can sign up for quick pay with most brokers for 2-3%.

 

I very respectfully disagree with a lot of this. Almost ALL megas run off a revolver (revolving line of credit) at about .02% for their money. Any benefit of factoring would be absorbed as all big carriers have a very well managed AR department and they manage funds, both in coming and out going, extremely well. They actually make more money selling/leasing trucks, binding drivers to maintenance agreements, leveraging funds to buy new equipment and funding practices that assure they turn revenue at least twice before they pay anything.
Don't take my word for it...do the math. They move freight (more of a sideline than a primary business) cheaper than everyone else, buy fuel cheaper (a greater expense than driver pay in 85% of cases), upgrade equipment every 2 years and have over 110% driver turnover. There is NO WAY they can pull this off without managing money as a primary focus.
I am a small broker and extremely small carrier. (1 truck that I drive to escape from the office and don't even allow my Mom to touch it) I have been in business for 23 years as a broker and am cash positive.....but.....I have a Prudential account that realizes more profit with no effort than my business does. The business is a great tax shelter.
Drivers always ask how they can make more money and the conversation always turns to fuel. where to run, which brokers to use, what freight to haul and all the things that added together comprise about 25% of the things one can control to affect revenue....when the real answer is how to manage your taxes and your money.
Factoring is a sure symptom of negative cash flow. I will not now or ever pay a factoring company and I don't load trucks that use them. (I lied, I do use one company that factors because he is a great small company that gives my customers excellent service and he made a bad decision at one time) I'm weaning him off the predatory factoring company and once I do that will be the last.

 

I see more and more brokers offering quick pay. For the most part a carrier should be able to work mostly with brokers who only offer quick pay or pay within a short time. If you take the time to properly check credit and only deal with brokers or shippers who have good credit, you should not have to worry about being paid. It is extremely rare for any business to not have any bad debts. But, if you stay in business long enough it will most likely happen. There are many smaller carriers who simply don't bother to check credit and documents prior to extending credit. You can subscribe to a credit monitoring service. But, the primary concerns on this thread is whether to factor or not. Like OZR says, you could just set up with brokers who offer quick pay and that would avoid having a line of credit expense and dealing with a factor. When I did factor, I never had a broker not be willing to do business with me because I used a factor. I did have a few instances where the factor would not accept a broker, but that was only a very few instances where the broker took longer to pay than the factor wanted. I was careful as to who I sent to my old factor. You still need to watch the quick pay rate. I have seen them as high as 8%. That is way too high. I would like to see brokers operate like nearly all of them used to operate. You took the load, delivered it and the broker wrote you a check with NO discounts. I still have a couple of accounts that do that.

 

we charge 1.67%...but.....we almost always just add it back in to the rate. We have good freight and very loyal carriers. Without them I would not be in business so we remember that and treat them in kind.

 

I couldn't agree more. I used to manage a $1B and $750M asset-backed loan for a public company that did $6B in revenue. We also had an $800M securitization (like factoring) facility, a $3B debt portfolio and a market cap of a few billion. Our business was like transport in that margins were getting thinner by the day. We had to manage cash flow since we did almost 66% of sales from September to October and customers took over 50 days to pay on average. Bottom line: cash flow issues are not specific to trucking and factoring can be a useful tool for many (but not all) situations.

I could not disagree more with the notion that all companies that factor are in trouble. We have helped hundreds (if not thousands) of companies grow. They use us for as long as they need and then graduate to other forms of financing, but they never would have gotten there were it not for us. Many brokers that offer QuickPay can only do so because they too are factoring so they have the liquidity to offer this service to their carriers! How could these same carriers criticize the very financing that makes it possible for them to be paid sooner? By all means, use QuickPay if makes sense to do so, but consider all information and options and make a wise, informed choice.

 

I hear you, but don't agree. While what you say may be true of large carriers, it is not true for them all. Furthermore, you have a single truck and are clearly not focused on growth.

What if your client says you could go from $100K to $1M in revenue from him this year at the same 10% margin, but he'll only pay in 30 days. You can't wait 30 days to be paid so you could either accept the business and factor at 3% for 30 days on a recourse basis or refuse the business. You'd make an additional $60K after factoring costs. Would you say no?

Companies that are growing quickly usually have negative cash flow as they must pay suppliers, employees, taxes, other expenses before they collect from their customers. Factoring can help them survive through this cycle until the hyper-growth stabilizes. Many of these companies do not qualify for conventional loans.

 

Some brokers also factor receivables in order to offer quick pay to carriers. There is a cost of money. I don't have anything to gain or lose in this debate, but I do understand how business works. Growth is not cheap. It is sometimes better to give up a few percentage points to factor so that you can continue to grow your business. I think the main difference between a small carrier factoring and a major carrier is the rate that they charge. As a matter of economies, a large company can negotiate a lower rate than a single truck operation. Factoring may not make sense for all businesses, but it can work for some.

 

Don't assume that because I now have a single truck that I'm that small a company. Or have been a small company for very long.
I'm going to stick to my assertion here and suggest that a revolving line of credit and factoring are two very different functions. My opinion is that you guys are confusing the two. They may look the same from 40,000 feet but they are very different.

 

I did not mean to imply that you are a small company or unsuccessful in any way: it just seems that growth is not the focus of your carrier business. Nothing wrong with that, but others on this forum DO want to grow that business and factoring is an excellent tool to support that growth if your business is run properly and you deal with a reputable firm.

I agree that a line of credit and factoring are inherently different tools, but either can be used successfully and I think it's unfair to suggest that companies that factor are doomed.

 

Thanks for the response. I wouldn't call a company that factors "doomed" but in the business community it is not advantageous to have a bank or factoring company bill your customers or initiate any financial relationship, binding or otherwise, with your customers. Prior to the rise of "factoring" this type of relationship would suggest that a business was in receivership or otherwise in need of the oversight of some third party financial support to continue operations. In all of the cases mentioned in this thread the case is made that the company needs financial support to include A/R management.

The primary difference in factoring vs. working from an established line of credit is that the customer relationship remains between the customer and the service provider.

As a small broker, former trucking company owner, former business partner in several transportation service providers to include air, ocean and trucking I can tell you that in all cases when we receive a notice from a bank regarding receivables for a trucking company a huge red flag goes up and in most cases we ended the relationship rather than become involved in 3rd party financial transactions.

The very few times I have been involved in "factoring" from a customer (payer) position have resulted in a confrontational relationship. The trucking company and the factoring company were in constant turmoil, with a very few exceptions, and my company was pulled into the disagreement. I can't afford, and I do not have the time or desire, to spend time trying to sort out rates and payments when the trucking company and factoring company have a dispute. Given this constant annoyance I chose to end any relationships with companies that factor. I can also attest that many of the 3PL companies I am involved with feel the same way.

I posted all this not to insult anyone, factoring or trucking, but to provide an answer and counter-point to the conversation. Simply put and good advice to a small trucking company would be that most 3PLs prefer NOT to do business with factoring companies. If a small trucking company has other resources they would be well served to use them and resort to factoring only if they have no other means of cash flow.

Just my opinion.......and God knows I don't claim to know everything about anything!!