Raise your hand if this has happened to you: You’ve delivered a load and billed the customer, and now, four months later you still haven’t been paid. You’ve sent several emails, made five phone calls, and still no response. How much time and effort should you put into collecting that receivable, or should you just consider it a lost cause?
It is a scenario that plays out more often than any smaller carrier or owner-operator wants. Sometimes it’s because the customer simply is a slow payer, other times it’s because the customer is taking advantage of the fact that you don’t have a large office staff ensuring these bills are collected.
Once this happens to you, there are really only three options: you can keep investing time and money into trying to collect the debt, you can contract with a bill collector to collect it on your behalf, or you can forget about it.
None of the options are particularly appealing and any may end up costing you more money than the original debt was worth. A fourth option is to take a proactive approach to managing your receivables through factoring.
Let’s run through some of the benefits and pitfalls of each of the scenarios. The worst-case scenario is simply forgetting about the receivable. That is just lost money, and as the saying goes, receiving any amount of payment is better than receiving no amount of payment. But, if you tried unsuccessfully for months to recoup the debt, there comes a time when you just have to cut your losses and move on.
That leaves two other options. The first is to keep chasing down the offender. For a fleet with resources, this provides the best chance to recover the revenue. But, there is a cost there in terms of time spent making phone calls, sending emails and even sending mailings. If you determine that cost justifies the time and money spent, then it should be pursued.
The third option is to seek out a collection agency. A collection agency could be a firm or even an attorney that handles collections, but it usually comes with a fee. How much? Like most things in life, it depends.
Depending on the size of the debt an agency is asked to collect, it could be a small flat fee or a percentage of the receivable. That percentage can typically run from 25% to 50% or more, depending on the time it is past due and the difficulty it will take to collect the debt. In some states, debt collection fees can be written into the contract requiring the customer to pay some or all of the fees associated with collecting the debt, although this varies by state and the inclusion of said provisions could cause the customer to refuse to contract for the load. If you are a small fleet or owner-operator without the necessary leverage to pressure the customer to pay, chances are small the customer would agree to such a provision.
There is a final approach that may be the best avenue to collecting debts for small carriers and that is taking a proactive stance by entering into a factoring agreement with a company specializing in this form of cash flow management.
A factoring company agrees to accept the risk of collecting a receivable by acquiring the receivable from the trucking company or broker in exchange for a fee. Typically, a factor buys the freight bill from the carrier for cash – at a discount. The carrier doesn’t receive full payment, but it does receive money sooner. The factor then collects the debt from the broker or shipper. Brokers use factors in a similar way, usually to pay carriers quicker to ensure needed capacity down the road.
Fees can range from 3% of the total bill to 10% or more, depending on the factor. Also, some factors will tack on additional charges while others do not, so it’s important to review the terms of any factoring agreement. In other words, a 5% discount may not be equal in all circumstances.
The advantages of factoring are numerous – especially for smaller fleets that are constantly chasing down delinquent customers. By factoring, a fleet can ensure a consistent cash flow. Rather than waiting 90 days for a payment, it can receive that payment within a week – often within a day. Brokers use factors to ensure their fleet partners get paid quickly, building a good relationship that can secure capacity down the road.
A factor will look at the credit-worthiness of the customer, and if they are deemed acceptable, it will purchase the receivable. A good rule of thumb is if your factor won’t accept the risk of the debt, then you should seriously consider whether you should. Remember, a factor likely has more resources and information available on that customer than most small fleets can marshal, and if they are not comfortable with the risk, that is red flag.
Factors also eliminate that pesky time and effort spent chasing customers who haven’t paid, allowing the fleet or owner-operator the opportunity to spend more time on the road earning additional revenue. A factor – even at a 5% fee – is also a better alternative to losing 50% of the receivable when it’s turned over to a debt collector.
So, there are generally four options any broker or fleet has when faced with customers that do not pay in a timely manner. Only one of those can be considered a proactive approach, and only one ensures you will get the majority of your money.