Factoring Companies

i was reading over the responses on this thread...First, 5% of one freight bill of a $1000 versus 5% of 1000 freight bills totally $1,000,000 is still 5%... does it add up over the year? Factoring can and should be consider "outsourcing", in that it cost you 5% of your revenue to maintain you A/R's. If you are a one man show, lets say 1-5 trucks and you're trying to streamline your overhead expenses this might be the most practical methos to your madness. Now if you are growing and start generating enough cashflow to sit on your A/R's until they pay AND not put yourself our company in a financial bind, then you might want to start hadling your own. I feel that if today's O/O's, especially the new ones who are trying to embrass the "American Way", apply basic financial DISCIPLINE", the need to "factor" will inevitably become less profitable. I would discourage "factoring" on the premises of wanting to not wait on your money,,,remember the old adage, "NOT ALL MONEY IS GOOD MONEY"...

 

HOLD ON A SECOND....not to question your intelligence, apparently you've done that already...There is no APR solution to your equation. 5% of total A/R's is just that 5%...regardless of the time span factored or the dollar amount submitted...IF and only IF, the money was loaned to you from a funding company a.k.a. factoring companies and you held the liability of recourse on that money, then you could consider the APR, because you money is in effect a loan and you are waiting for it to clear their accounts...However, most or at the least some of these factoring companies deal with "net now" versus your typical net 30 or even higher...
Im not trying to say stop and turn to the dark side(handling your own affairs) but if it cost me upto 5% of my annual revenue to get my money now, and im DISCIPLINED enough to not run in the red, then i say go for it, If you have the money saved up and can afford to sit on NET30 or more, then that works too for the better, but noone usually has 10000-20000 to verture off on their own right of the jump and sit in effect on their money....
Not tryin to offend you HDD but your math is waaaaaaaaaaay off.....really, think about it....you'll see .......

 

Were does this formula come from?
According your formula they would have to take out 5% out of the every settlement every month, but they are not ,they are only taking it out once. For example a load pays $1000, the factoring company pays you $950 (95%). Under your formula they would have to continually take out 5% every month out of one settlement for 12 months to achieve 60%. They do not continually take it out, they only remove the 5% once.
Technically the monthly rate would be .0041, not 5%, over your yearly receivables (if they were to take it out of each settlement every month).

 

The Factoring company's I talked to said that they would only charge you back if there was some fraud involved in the presentation of the BOL to them. Such as a there was a claim shortage, late delivery, etc. and you sent the BOL to the factoring company without notice of these problems. Anything that would delay payment to them because of something you did or did not do, will cause you problems. If the Broker,.etc. fails to pay it is on the factoring company, unless the reason for failure to pay is caused by you. One of the factoring company's said that most of these problems come up as a result of refer issues, but he said that was rare.

They only negatives, other than losing part of the charges, is that you cannot use another factoring company. So if the broker who owes you money is not on their "list" you cannot use another factoring company. You can ask them to put a broker or shipper on their "list," but there is no guarantee that they will. One of the places charges $150 to terminate the service if you want to switch to another factoring company. However, he said that if you get to a point where you do not need that factoring company you can just stop using it and not be charged. One place said that you can add and remove brokers, shippers, etc. from your factoring "group" that you use (I didn't ask at the other places, but it is likely the same).

Credit scores of the brokers,shipper,etc. do not matter. Load boards usually charge a monthly fee for credit services ($30-40).

Most of them have fuel cards you can use (such as comdata) and you can either keep the money on the card or transfer it to your bank account. There are always little services fees involved (most fuel cards have them anyway), so make sure you ask how much it costs to get your money.

A lot of the load boards have factoring company's associated with them, so they will mark on the loads if it is factorable.

I suggest you ask the factoring company's as many questions as you can regarding what you can be charged for and want you can and cant do. If they cant answer then move on. Most of the ones I called were very helpful and answered all of my questions. They were all around 5-9%, usually the ones with the hire % had the most known brokers, shippers, that were factorable and they you have an online "account" that you could access to keep tract of what is going on.

 

Not quite sure I grasp what your saying here, KW.

First, I stand behind my numbers. Yes, it's 5% of total A/R's that you are paying. But it's not the correct way to figure your true cost. Instead of using an APR as a comparision, which seems to be confusing the issue here, let's look at it from the standpoint of return on investment, which every (good) businessperson does religiously.

Factoring companies have a great ROI. In fact, at 5% per invoice they are making a killing off of you. Let's say you plan on factoring $10,000 a month for the next year. The factor is going to need $9500 on hand to cover your first month. At the end of the first month , he's paid you $9500 and collects $10,000 from your customers.. He pays out the SAME $9500 to you over the course of the second month, again he gets $10,000. This continues for the rest of the year. And every month he's earning $500 on his $9500 investment. At the end of the year, he has his original $9500 and has collected $6000 in fees from you. His Annual return- 63%

What I'm saying is- DON'T FACTOR. Put the $10k in a cd as part of your cash reserve. Saving that 63% is the same as earning 63%. Ben Franklin said it better then me.

I will agree with you on your other point. Many new independents have trouble raising enough cash to get started. But if they can't stash away an extra $10,000, how on earth can they afford to pay $6000 a year to a factoring company? Profit margins in trucking are too slim as it is. And in my opinion, anyone who starts out undercapitalized has already dug a hole for themselves.

 

Yes that sounds right. Good for them. This breakdown shows that they don't spend 95,000 to make 5000, they only spend 10 to do it. As long as we're all on the same page as to the true impact to you, the customer. I wouldn't be deterred from using the service solely because its easier for them then it would first appear. Again I would avoid it to save 5k a year.

 

Good post, Jason.

My only disagreement is when a pre-approved broker becomes a slow payor and is dropped from the approved list. I new a few people who thought they were protected (under non-recourse) only to find out they had to reimburse the factor for unpaid invoices that were advanced.

There is one factoring company (associated with a popular loadboard) that offers non-recourse at 5%, but the trucker is only covered if the broker files bankruptcy. That doesn't happen very often. Most brokers who go out of business disappear into the night, and re-emerge a few weeks later under a new MC#. You may have an ironclad agreement, but I'd check further...

 

There are non-recourse factoring companies that assume the credit risk in the event there is a non payment beyond the broker filing for bankruptcy. I agree that some nefarious brokers will just go out of business rather than file for bankruptcy and pull out a new mc# from their back pocket to start up another brokerage, but there are a few factoring companies that will honor this credit risk. Also, there is a way to decrease your credit risk when choosing a load from a broker on the load board and that is to check their authority on the FMCSA website to make sure they are in compliance with an active authority, have a surety bond, and not in revocation. Most good brokers have an investment in their business and the FMCSA offers the ability to check compliance.

I would offer that those factoring icons on the load board are based upon credit reporting from credit agencies, which sometimes can become dated information.
Although, a non recourse factor displaying the icon should honor the purchase of the load whether an icon is on the board or disappears it is best to check with the factor about the credit of the broker. Remember, the credit scores displayed from credit companies and the factoring icons are based upon payment history, but the economic environment can change leading to a shipper not paying the broker and the broker not paying the bill. A factor may have more insight to the transaction beyond just the credit report displaying payment trends. Often times a shipper in a troubled industry may effect the broker's ability to pay in a snap of a finger.

 

i use d&s but not for all my loads some brokers pay right away some charge a lesser fee . but when you need your money right away you get it minus 5%. their contract is very simple no fine print. not many guys can afford to wait 30 days when the fuel got near $5 a gallon. are you better off not using them ,sure . they are basically buying your invoice it is not a 30 day loan. no recource .free tripak . i have never heard of them comming back after anybody.as long as you call and verify the broker ( i do it for evey load , it's an 800 number) and they ok it your coverd. they bill the customer/broker .. any load i factor i negotiate for more money to cover the fee (which is a deductable expence)


another way to look at it when you do a load for somebody and they don't pay you upon delivery you are extending them credit for 30-45 days

 

This has been an interesting discussion.

Guess I"m in a very small minority of those who dislike factoring companies.

One thing I find interesting- There is no shortage of truckers who complain (loudly) about cheap rates and greedy brokers who skim 50-60% or more off the rates. Yet when it comes to factoring, the attitude seems to be "as long as I get my money fast, it doesn't matter how much they make". They're the greatest thing since sliced bread, even though their profit margins are higher (at the expense of the struggling trucker) than even the greediest broker.

Oh well. If I convinced One person to seriously think twice before signing on the dotted line, I've accomplished something...