Factoring - What's normal and is it worth it?

Well I think factoring for most owner-operators is an issue because it implies you don't have enough money to run your business.

I will tell you that in my opinion when you get started if you need some additional cash flow it's better for you to find some Brokers that will pay you on a quick pay while you do work for others that will pay you in 30 days or whatever.

If your need for cash is that insatiable that you can't do a mixture of both to get yourself on your feet then I'm with everyone else and questioning your finances.

I do not want to give up 2 or 3% of my income because I can't wait for my money. I have one brokerage they put me on a quick pay and I did it because I was having problems with them and I wanted to make sure I got my money right away. Now I know they will pay me but whenever I do a load for them it really bothers me I have to give them two or 3% whatever it is. Their quick pay program is forever unless you do a bazillion loads for them and it burns me up that I don't get the full price for the load yes I know charge more blah blah blah. Luckily I don't do a whole lot with them so I live with getting my money right away and paying a percentage.

Let's say that you gross $20,000 in a month. If your factoring cost 3% that is $600. In a year that is $7,200. In five years that is $36,000. At 5% that is $1,000 a month, and $12,000 a year and at 5 years $60,000. That is completely insane to give that amount of money away.

That is money that you gave away because you don't want to do your own billing and don't want to wait to get paid. That's mind-boggling.

I will tell you being a one-person operation especially if you do a lot of billing you need a good system that everyone gets billed and you keep track of it. Sometimes it is a pain in the rear end. Sometimes you do have to call people and say hey I never got paid for this load and sometimes you have to call people multiple times.

But for me myself personally that is not worth 7 or $8,000 or 10 or $12,000 a year for me to pay someone else. To me that's like lighting your money on fire. That just makes no Financial sense whatsoever.

If you don't have the money to carry yourself then you need to be earning more money and you're actually earning less money because you're paying someone to do this so now you didn't have enough money to start with and you're making less money. To me that's a downward spiral.

That's not gatekeeping or anything that's just good Financial sense. And if you see it differently or do it differently and that works for you then that's great.

I don't see the need for it and in a business where there are plenty of people taking money out of your pockets, I'm not going to voluntarily give any more away.

That's what wives are for, LOL.

The exception that I can see to the factoring would be like a situation where you have a number of trucks and it's just an immense task to do all of the billing and you would have to hire someone then maybe in that case it makes more sense to just pay a percentage.

But for a single owner operator that to me is just lighting your money on fire.

And to the newer owner operator that said about going after the Brokers Bond, remember that is only for Interstate loads, not intrastate, and there are excepted commodities.

 

It depends on the company. Some allow it, some don't. Mine allows me to choose which brokers I factor, but once I factor it, I can't choose which invoices from that brokerage to factor.

 

I think you are hitting on an important aspect of factoring which is managing tail risk in addition to outsourcing labor.

As an example I'll use round numbers within the ballpark of reasonable as I view it. I'm forever a student in this life so feel free to point out any mistakes I may have made.

120k miles * $2.5 a mile = $300,000 * 3% = $9,000 a year for factoring service.

Landstar avg trip length for 2Q22 ~700 miles. 700 miles * $2.5 a mile = $1,750

Following this train of thought if you had 5 instances of brokers going bankrupt per year it would be about breakeven as a risk mitigation approach.

On the other end of the spectrum, one instance of non payment per year... $9,000 - $1,750 = $7,250

$7,250 offers two options, the first is valuing your labor at $50/hr you have 145 hours to chase down the non payment and seek recourse.

The second option is to outsource that recourse to a legal professional which would purchase about 36 hours from the law firm with the average billable hours per case landing in the 8 to 10 hour range. So, 10 billable hours * $200 per hour = $2,000

So in the very low probabilistic event that an episode of non payment ends in zero recuperation you would be $5,250 dollars ahead by not factoring.

From the inverse perspective, for every instance of non payment average total risk would be $3,750.

The million dollar question is what is the frequency of non payment? In the above quoted example I see one instance in 25 years but that is anecdotal and in now way represents the actual frequency of non payment.

Getting into the math, including compounding interest and all the other fun details probably would take some time to have a somewhat accurate estimation accounting for changing rates and inflation, blah blah blah when it comes to identifying the lost opportunity cost of that inflated outsourced business expense.

Thank you

 

Math is your friend. Most brokers offer quick pay for free OR the same % as the factoring company, so why not just skip the extra paperwork and headaches of dealing with a factoring company (I used one - never again)? The only way to be paid in full is ACH or by a check and waiting the NET30 or whatever your contract or ratecon says. A check is also the only way to get paid that isn't traceable if you have a means to cash each check and then dispose of the cash however you see fit.

Here's one way to get around the "need" of a factoring company:
Sign up to many, many brokers. Then, based on their pay schedule, pull loads for each one so you have funds coming in at all times during the month.

I use some brokers that pay in 24 hours for free, some that pay in 10 days for free, some that pay same day for 3%, and some that use ACH in 30 days and some that write me checks, and others. I have different institutions that I use for different brokers and each account is then used for different things, like fuel, payroll, etc...

If you have just a truck, you can move trailers for JB and they will pay you next day for no charge and no paperwork! Then you can move another load using the money from JB and so on until you have a little in the bank and you set up your expenses, like fuel, to be automatically deducted. It won't take long to have a surplus of cash and you can breathe. A factoring company is one more step that doesn't really do anything for you...this is assuming a solo o/o.

If you have more than 1 truck, you probably need a factoring company to ensure you have cash flow. However, you don't have to send the factoring company every BOL to factor. You can use the brokers that pay quick and cheap and save the factoring company (FC) for the ones that you are unsure of or the FC has a better rate than the broker for quick pay. Say TQL is 5-7% for 2-5 day pay and the FC is only 1-3% for 1 day pay...send the TQL paperwork to the FC and let them wait on the broker.

USE them as a resource for YOUR business only if it helps you out somehow, otherwise they are a waste of resources...to include your time when you choose to kick them to the curb.

 

unfortunately most Americans can't save money, or if you never fails emergency steals it from you. My first week as own authority operator and I totally get the pros and cons with factoring
That said don't sign a contract with them. Almost all brokers use a non recourse factoring service to do quick pay. Once you get established then and trust these brokers will pay you drop the factoring and wait at most I've seen been 30 days

I feel though just starting out factoring is definitely a nice layer of extra protection, even well established companies use factoring companies to get credit reports on brokers just saying

 

A extra layer of protection is money in your bank account. Not factoring. If you use factoring your giving up that little bit of profit you earned to be your protection makes zero sense! How much experience do you have giving these pointers!?!

use factoring for checking on credit on brokers??? Umm, dat, truckstop, etc.. an established company already knows which brokers are good. No reason to spend 3-5 percent of profits on a factor, a large company that would be a fortune. Trucking is not a get rich quick industry, giving up 3-5 percent is astronomical on a annual or decade level! But, what do I know… I must be doing something wrong. I should start factoring and then have a third party dispatch me next…or maybe I’ll go all in and use quick pay! (Quick lose)

 

Nobody pays 3-5% for factoring. You can find factoring for 2% or less. And yes, having a good third party dispatcher is much better than dispatching youself. Thank you sir !

 

I'm getting calls every day from dispatching services. One guy wanted 6%. I just laughed at him.