The Growth Factor

While factoring comes with costs, independents can successfully use the cash flow service to expand.

For many independents and small-fleet owners, “factoring” conjures up negative images. They probably know someone who lost money or went bankrupt after turning their accounts receivables over to an unscrupulous collections agency. Likewise, accountants and financial advisers typically steer clients away from factoring.

Even some companies that factor tell owner-operators the practice – where accounts receivables are leased or bought from independents and trucking companies by third parties, who then collect the outstanding invoices and keep a percentage of the bill – isn’t for all operations. “Factoring doesn’t have good applications for most owner-operators,” says Ken Brown, general manager of United California Discount. “If an owner-operator only has one truck and isn’t growing, factoring isn’t really helping him accomplish anything. He’s just added another bill to his deteriorating profit margin.”

Still, if used strategically, the service can supply the kind of cash flow that trucking operations need but can’t always get from a bank. For many independents looking to grow beyond one truck, factoring may be the only way to manage increasing expenses and slow-paying shippers.

When money got tight for independent Rick Seufert, he turned to factoring to keep his two tractors and one straight truck on the road. “I factored my receivables to maintain cash flow,” Seufert says. “With customers agreeing to pay in 30 or more days and many of my commitments (like payroll) coming due in 15-day increments, I had to do something to bring the cash in faster.”

Other truckers say their experience with factor companies wasn’t so helpful. “It was like dealing with a loan shark,” says owner-operator Mark Portolano. “No matter how much (factoring companies) preach they’re there for you for cash flow, you’re the person they’re trying to make money from. For some people it probably works good. I was probably not in the best position to be dealing with them.”

Factoring companies typically buy or lease outstanding accounts receivables and advance a large percentage of those invoices – often 80 percent of the bill. Then they collect the invoice and charge a fee of 1.5 percent to 10 percent, based on the difficulty of collecting it. For example, on a $1,000 invoice, the factor loans an owner-operator $800, then attempts to collect. If the collection goes well, the factor will send the remaining $200, minus a percentage for the service, to the owner-operator. For an operation short on cash but long on expenses, the loss of a small percentage of revenue may be worth it for the cash in advance.

At their heart, factoring companies are collections companies that offer short-term loans. They loan money on collateral (an uncollected invoice) like a bank, charging a percentage of the overall loan for the service. Then they call on the shipper to collect the unpaid invoice, using the same tools as a collections bureau – letters, faxes and phone calls.

A small carrier needing cash might turn to a bank for a line of credit, often receiving better terms than what a factor gives. But a small owner-operator business often doesn’t have that option, especially if the business is young or the owner has credit issues.

“Factoring works the best with businesses that are growing and less than five years old,” says Tim Valdez, vice president of Flying J’s Financial Services Division, which offers factoring. “You can get approved for factoring easier than at a bank. If you’ve been in business less than five years, you may be making money but you either can’t get a credit line or it’s not sufficient for your cash flow needs.”

Under ideal conditions, factoring terms are pretty reasonable. If your shipper clients are good credit risks and pay in less than 30 days, then a factor will probably charge a minimum fee – as little as 1.5 percent. But if the invoice isn’t paid in a timely manner, the percentage can go up – usually to 10 percent at 90 days.

Typically, a factor leases an account receivable with recourse. That means if the shipper doesn’t pay after 90 days, the factor returns the receivable to you, charges you its fee (10 percent or higher) and bills you for the 80 percent advance. Sometimes this comes out of a reserve fund you have with a factor; otherwise it comes out of your pocket.

So your losses could include $100 or more to the factor in addition to any expenses you incurred when you delivered the load. If cash flow was a problem when you turned over the bill, paying back the 80 percent plus interest could put you in dire straights. “Watch your reserves,” Portolano says. “Know your customers well. When they screw up, the factoring company will get you one way or another.”

A good factor, however, will tend to avoid invoices of shippers with a history of payment failure or delay. It serves them and their owner-operator clients the best to collect on invoices that pay – and pay quickly.

Even when factoring goes well, it can take the profitability out of your load. “I factored the smaller accounts that generally had a higher markup to begin with,” Seufert says. “I tried not to factor the couple of larger accounts I have because in order for me to get these accounts in the first place, my rate on each load had to be very competitive.”

Seufert also notes that factoring increases the risk of damaging your relationship with a shipper. “Having a third party calling on my customers caused friction at times due to aggressive and ineffective collections procedures,” he says.

Factoring companies say they don’t resort to aggressive tactics unless the client authorizes them to. Instead, the rely on proven methods that their clients are aware of before they turn over invoices.

“We always do soft collections at first,” says Traci Loebbecke, operations manager for Neil Freeman Investments. “We send an invoice out first day we get it. We wait three to four days, then follow up to make sure the shipper has the invoice. Clients give us tips. We customize our collection efforts to how the clients want us to.”

Factors also say the benefits can far outweigh the drawbacks, especially when you want to expand. “If you want to add one truck, out of pocket it’s going to cost you $11,000 before you earn the first dollar,” says Flying J’s Valdez. “You have to not only pay for fuel, but for the driver, the truck and the insurance – everything that goes with starting up a truck. If your accounts receivables average 45 days, you’re going to run 40 days before you earn your first dollar.”

For a typical three-day haul, an owner-operator can collect an advance from a factor in as few as three days – often within a few hours of delivering. “I can fund this new truck through factoring without any additional money in my pocket,” Valdez says.

Factor companies also help by freeing those owner-operators who’d rather drive than spend time on collection efforts, Loebbecke says. Other owner-operators turn to factoring to meet seasonal shifts by smoothing out the slowdowns in revenue through the year. And when fuel prices spike, a factor’s fast collections can offset those extra costs.

Factors also typically supply clients with credit reports on shippers. In the case of larger factors that do business with many clients, like Flying J’s Transportation Alliance Bank, the threat of a bad credit report can speed up sluggish shippers.

When Seufert began to expand, he turned over about 30 percent of his invoices to factoring. “A good customer with good credit warranted a 3 to 5 percent charge,” Seufert says. “A customer with less than stellar credit cost me 10 percent off the top.”

The cash flow cost him, but also facilitated his immediate goal of growing to a three-truck fleet. That’s a good use of factoring, but truckers who turn to it strictly for the convenience of money should beware, says Brown of United California Discount.

“When a guy who’s not expanding turns to factoring, he gives himself enough rope to hang himself,” he says. “The question you should ask is: Should I be in business with a shipper who doesn’t pay on time? Nobody should be supporting a guy for 60 days. Nobody should work with someone who can’t pay on time.”


WHAT CAN HAPPEN TO YOUR $1,000 INVOICE

BEST CASE
$1,000 invoice paid to factor
– $15 minimal factor charge
(1.5%) for easy collection
=$985 | owner-operator’s net gain

WORST CASE
-$1,000 invoice remains unpaid
– $100 factor charge
(10% or higher) for efforts at unsuccessful collection
=-$1,100 owner-operator’s net loss


RESOURCES
Apex Capital Corporation
www.apexcapitalcorp.com

Flying J’s Transportation Alliance Bank
www.tabbank.com

Neil Freeman Investments
www.nealfreeman.com

TranCentral Financial, Inc
www.trancentral.com

United California Discount
www.ucdc.com

The Business Manual for Owner-Operators
Overdrive editors and ATBS present the industry’s best manual for prospective and committed owner-operators. You’ll find exceptional depth on many issues in the 2021 edition of Partners in Business.
Download
Partners in Business Issue Cover