Freight capital not paying...

Red, as always, has good, well thought out responses. Wanted to emphasize a point that he made as to what some people us factoring for - risk avoidance.

I was never one that truly believed in the risk avoidance side. After reading the contracts in depth and the level control that they ask over your business (or the contract gives them) showed me that for even the smallest reason could get them out of paying bad debt.

Then we looked at buying a couple established factoring company. After sitting through presentations I am 100% convinced that these companies have zero intention of paying for bad debt. One even showed me the only bad debt the had over the past 2-years was when the carrier went under and they couldn't collect. Everything else went back to the carrier. We decided we would not be in that business because it is hard to compete ethically when people are playing by different rules.

Better using a recourse factoring and using your own credit standards.

 

Really? I'm surprised that this would have been remarkable to you. Insurance companies have been doing this sort of thing for a hundred years.

I understand your perspective, but I'd expect no less from a factoring company. Think about this a minute. They're extending a line of credit on the premise that the carrier has completed the load exactly as the POD shows (prerequisite to funding), and that the payor (that they would have approved to begin with in most cases) will in fact make a timely payment in full. Given all that due diligence, collection is near certain. Bad debt would then most likely be a result of fraud or bankruptcy.

I think the only place ethics comes into play is whether the factoring company partners with the carrier to resolve collections, or drops the hammer on them with the first whisper of a claim or day 61, whichever comes first. At the end of the day, it's on the carrier to settle claims. The factoring company that partners with their carrier will grow their business, the one that drops the hammer will be a revolving door for carriers. Not to mention that not supporting their carrier's collections is shooting themselves in the foot twice. Making things hard on the carrier will both make the factoring settlement drag out in dispute, it will also make the carrier think twice about factoring more good business, possibly jumping ship altogether. You can see from the factoring topics on TTR that there are only about 3-4 factoring companies that fall into the "partnering" category.

As a factoring company, I'd view zero bad debt as a reasonable business metric. It would indicate that I have carefully chosen responsible carriers to extend credit to, as well as done adequate due diligence on the payors that I'm securing the loan against.

I agree with you on the merit of non-recourse terms. It's pretty rare that a payor goes lights out with no advance warning. Factoring companies will trend a troubled broker and stop funding their invoices weeks and even months before they ultimately quit paying.

 

That's why I said rare, not impossible. I didn't think to look at their customer profile at the time Eleets went TU to see if they trended or just went out in a flash. From all the reports it sounds like Eleets was an extraordinary case, running business as usual right up to the end.

A little effort on Google leads to this article. The short version is: their demise was a result in aggressively ramping up their carrier division in pursuit of a large shipper and the deal didn't consummate quickly enough. The resulting cash flow crunch got their $1.5M operating credit line frozen and the rest is history.

A more common scenario would be a broker circling the drain a while. Their DTP creeping longer until the factoring company ultimately stops funding those invoices, limiting or hopefully eliminating their exposure.

As of the article, dated a month ago, Eleets had not yet filed bankruptcy. I'd expect this to make some non-recourse arrangements a little murky in the interim. If I had any of their receivables out with Freight Capital, I'd have pretty much kissed the 10% reserves goodbye and stay in contact to offer any support I could to assist their collection efforts. The only time I'd expect any further issue would be if, near their demise, I had accepted a load with a full recourse credit approval (this may have happened if they started trending bad). Then I'd be getting ready to take the hit of a charge-back, while doing everything possible to delay it and collect.

That said, when an ordinarily solid customer suddenly comes back full recourse on a credit check, I usually call in and find out why. I've done that on a few occasions and have cancelled a load. In one case it was a more established broker and I ended up not factoring, while negotiating a big advance and COD on the balance (which was collected without a problem).

 

I'm not talking the normal stuff Red. I am talking about the Eleets type of stuff. Wait and see how many people get charged back on Eleets that had non-recourse factoring. Most carriers that have to use factoring don't have the resources to fight it let alone have no factoring. If you need it they have you by the short and curlies. How long do you think most that factor can go without cash flow?

I had this explained to me in great detail. Surprised OOIDA hasn't taken one of these companies on.

 

I'm watching with interest for the reason you state Bill. I have no receivables on them, so no dog in that fight thankfully. I don't know when exactly Eleets started slipping on payables, if they even did before they shut down. Still a little early - we're just coming up on 60 days since the end. A bankruptcy filing would clean things up, but I have a feeling that's not going to happen for a while yet.

 

It is not about Eleets but if they intend to pay or not (factoring). At what ever stage the factoring company says an invoice is bad they don't even need a good reason. All they have to do is make something up and charge the carrier back. For the most part carriers will just take it. They are not in a financial position to stop factoring so they are not in a position to do anything about it. And the factoring companies know this.

How much are you going to fight over a $1,000 invoice when you have other invoices being held and you need money for fuel? What are your options? Start billing customers direct? If they are customers you have factored in the past they are going to keep sending checks to the factoring company until you provide a release.

The factoring company doesn't need to have a reason that will win in court. They just need to have the carrier in a position that they can extort acceptance.

If you are doing non-recourse I would switch to recourse. You are paying insurance that the company never intends make good on.

 

That is what I meant. Eleets as a case study to see how that plays out with the various factoring companies. They have a ton of payables out on the street, no doubt at least a few held by every factoring company there is. I'm sure it won't be long before that news starts breaking.

Me personally on fighting over an invoice like that? It would be a big picture decision. One small battle in a bigger war. Like not getting in a knot over a missed detention payment from your best customer. My firm answer would be: it depends. Everything is negotiable, even when your position is weak.

 

We will see what happens. We got a check from them that bounced. We stopped hauling for them back at the end of July when we saw them playing games. Not a big deal because we didn't do much with them and it was always cheap.

But I know some factoring had shut them down already. They had been expanding their credit line for most of the year and that is a red flag for credit ratings. While it appears true they got shutdown by the actions of the bank I am not sure if the delayed account was as big of a factor as the owner plays. Last straw? Sure but he was known as bidding cheap on the brokerage side and then tried to run a trucking company off of those rates.

Once they do file for BK it will be interesting to see all the people that are owed.

 

Can you explain to me how they sold them a "fake" bill? A simple phone call would have stopped that.