Factoring math...let's not make it convoluted.

That's true except that it is in theory as most of us - down to Earth regulars folks - don't have such investment avenues or skills. That's why we drive trucks, shower at truck stops and wear baseball hats everywhere and not $5 0000 suits and drive Lamborghinis....LOL

 

Of course it sounds more impressive to say that you don't factor and that those who do show weakness.
Practically though, many successful business owners do factor and just see it as an aditional expense.

Again, a solo independent can wait 30 days to pay himself - you'd expect them to have at least $20k - $30k cash reserves but an owner of 20 trucks or 20 leased on owner operators needs fast funding, not only to do weekly payroll or settlement checks but also cash advances, fuel advances, break down advances...

 

The factoring fee is probably closer to 3%. 2% is ridiculously low.
$5,000 x 3% = $150

Warren Buffet said you should expect a rate of return between 6-7%

Average Stock Market Return: Where Does 7% Come From? - The Simple Dollar.

Being conservative, we'll use 6%.

$150/week invested at a 6% annual rate over 10 years is $105,923.88.

Once you start factoring, it's like financial crack and extremely hard to get off of. If it was no big deal and you could get off whenever you wanted, then why start factoring at all? Answer: Because you weren't liquid enough to cover the carrying costs of the receivables in the first place. By factoring, you've only made a bad situation worse. It's like going to the pawn shop repeatedly to have enough money to buy groceries.

 

A line of credit with a bank based off of a percentage of company receivables is a far less expensive option. They'll usually fund between 60-80% of the receivables and charge between 8-12% APR.

 

Know what's funny about that number? Based on the $100 that's right at $ 204 which is 104%

 

We all know there is a difference between leasing and fleasing. There is the same difference between factoring and ####toring. Depending on the terms, the situation, etc facotring may be ligical and benificial.

KR's 2 kagillion interest rate is disingenuous and distracting from the main issues.

 

Can a small carrier 10 - 20 trucks get a line of credit of $300 000 - $500 000? If so, then you are right. I don't know about other aspects such as effectiveness of collections or as someone mentioned earlier - the overall management of receivables.
I mean, I - 1 truck outfit - can handle $150k - $200k annual revenue comprising of 100 - 120 invoices but if I were to multiply it by 10 then perhaps it would be too overwhelming.

 

It also depends on building a relationship with a bank. In the banking world trucking company owners have a less than positive reputation for organization which is why most trucking companies go to the lenders of last resort.

Instead of submitting every single invoice to the the bank every day they would most likely look at past years financial statements and then work out an average A/R and percentage of those A/R to be funded when coming up with a lending line. If it's a new banking relationship, count on the funding percentage to be as low as 50%.

 

If you enjoy math then you would understand that you "borrowed" 5000, paid it back and then borrowed it again. Again assuming 30 day pay. If you took a 5000 loan and never factored, because you would have that 5000 You only need the money to cover 30-60 of invoices depending on DTP But justify it any way you like.

 

But you aren't paying it back.

Start with 0, borrow 5k, if YOU pay back 5k then you have 0. Do you not recieve money for the load? Do that 12 times and at the end of the year you still have 0 or only have 5k for an entire year of driving if you didn't do the last 'pay back'. Hence why I said the only way your example makes sense is if at the end of the year, you ONLY have 5000 more then you started with at the beginning of the year.

If you are factoring 5000 a month, where do you think most of that money goes if not your bank account? Obviously drivers who factor ARE getting money or they'd go bankrupt in less then a month from the cost of fuel so it should also be obvious they are not 'paying back' the money or they wouldn't have money for fuel, much less insurance etc.

Paying it back would mean you aren't getting an income. YOU borrow the 5k, the CUSTOMER pays it back. Factoring company pays you, then the customer pays the factoring company, correct? They are basically taking a percentage of the payment in exchange for paying you earlier. How is that different from using quick pay with a broker? Just because the money is there instead of basically being credit?

It's not justification, it is math.

I am going to guess that you are looking at it as you borrow 5k and your next load pays it back. But then the process repeats. Still has the same outcome though, by the end of the year you've had 12 payments and paybacks of 5000 and a total income of 60,000 because the paybacks are coming from the customer, not you. Or 11 if you don't count December due to the payback being from a load in January.