The aging receivables dilemma: To freight factor or not?

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08/27/2018 – By Jason Smale

The Cashflow problem!

Managing receivables and maintaining a positive cash flow is a challenge for every business, the trucking industry is no different. Whether you’re dealing with larger clientele and they delay payment on receivables for upwards of 60 to 90 days, or you’re an owner operator dealing with companies that are slow at paying their bills, one thing is certain, you’ve got obligations to meet on your end, and if the cash remains slow coming in, you may just find yourself out of business.

Freight factoring as a solution.

Some people may be unclear what freight factoring is. Freight factoring is a type of invoice factoring specific to the transportation industry. It allows trucking companies, owner-operators, and freight brokerage companies to turn slow paying receivables into quick cash. Freight factoring companies will offer to advance you up to 100 percent of the outstanding receivable minus any corresponding discount fee upfront.

It all sounds good, but what are the costs?

Fees from a factoring company can vary anywhere from 2-5 percent on average. This factoring rate will vary depending on the factoring company’s history with your business, your customers’ payment history, and the dollar amount of your anticipated invoice.
On top of this, factoring companies can charge you for an Application/Due Diligence fee. Not every factoring company charges this fee, but for those that do, it’s used when the customer you’ve done business with is an unknown to the factoring company. They’ll perform their due diligence to assess the creditworthiness of your customer before advancing you payment for the invoice. The Application/Due Diligence fee can vary wildly from one company to the next, so do your homework.

Types of factoring: Recourse vs Non-recourse factoring

Non-recourse factoring is exactly what it sounds like. The factoring company is taking all of the financial risk in this scenario and will be responsible for the pursuit of late payment of receivables. This is a lower-risk option for smaller businesses, however this option will come with higher factoring fees to offset the risk the factoring company is taking.

Larger fleets will often opt to take the recourse factoring option if they opt to get into factoring invoices. If a customer fails to pay, they can afford to return any funds remitted by the factoring company. The recourse factoring option comes with lower fees as the trucking business is taking on the risk of the receivables being paid.
The choice between recourse and non-recourse factoring, when available to you, should be considered, dependent upon the customer you’re serving. Sometimes the cost of non-recourse factoring doesn’t make sense if you’re dealing with a reputable business with strong credit history. If they’ve been in business for a long-time and have consistently paid their bills within expected terms in the past why reduce your earnings by opting for the lower paying non-recourse factoring option?

Considerations to be made

If you’re a mid-size or large trucking company, and you find that the issue is found with slow or delinquent payers within the customer roster, there are a couple of considerations that would be made. One is to check the internal procedures you have for your accounts receivable. For example, if your business does $250,000 a month in receivables, and you factor the bulk of these, you would end up paying $5,000/month for quick payment solutions on the low end of 2%. At Premier Business Solutions we have some sound strategies for improving the recovery of delinquent receivables that would not require factoring the bulk of your invoices. If the issue is not delinquent payers, but the fact that you deal with larger clients who are set on 60 to 90 days terms for payment, we have other recommendations to make that may be beneficial for your business aside from factoring your billables.

After having spoken with a few owner-operator and small fleet clients regarding the concept of freight factoring a few primary concerns came up.
1. They’ve been told the bank looks poorly upon businesses that use freight factoring when it comes to general credit. To clarify, this is not the case. We reached out to and spoke with loans officers at the Royal Bank of Canada to confirm our understanding. It was confirmed that utilizing a factoring company does not affect you on standard business loans; however it will affect you on revolving credit. The reason is due to security stipulations found within the general security agreement. A freight factoring company takes 1st precedence over any and all creditors in the case of a default on loans, and the bank simply will not enter into an agreement where they are listed as second in line to receive payment. For general small business loans involving the purchase of equipment and trucks, factoring companies will sometimes make a postponement agreement between themselves and the bank allowing the bank to take 1st position for trucks and equipment.

2. The second concern clients have brought up revolves around the factoring company’s authority to come back into their bank account and withdraw the funds they previously deposited, with little or no notice. This will happen if your customer fails to comply with the terms of their agreement.
See the above caption for Recourse factoring

3. The final concern revolves around growing a dependency on these freight factoring companies. As your company grows and the demands in the business change, so to could your need for factoring companies. But knowing how to plan to divest from this strategy and making sure you have enough funds set aside to get you over the initial adjustment period is a valid concern. Making sure you have the right plans for divestment is important when dealing with factoring companies. Factoring can become quite costly as your business experiences growth.

We cannot advise you as to whether freight factoring is right for your business. This, like many things when it comes to the management of a business, is not a one-size fits all solution. We can however, provide you with more solid feedback after sitting down to discuss this potential solution with you.

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