Cash Flow CornerNews

The hidden value of invoice factoring

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For many small companies, the time comes when they can’t handle the business side of the operation themselves. Fortunately, there is plenty of help available, from low-cost software programs that can speed business-side processes, to the other extreme – hiring office personnel to handle tasks such as billing and payroll.

One of the most costly tasks for small companies is chasing down accounts for payment. You’ve handled their load, but now they are dragging their feet paying the bill. That is costing both time and money for the carrier, which is why many smaller fleets and owner-operators turn to factoring companies.

Factoring can help smaller companies solve back-office concerns that are weighing on the financials of their firms, it can improve the management of cash flow ensuring there is always money available for both expected and unexpected expenses, and it can help improve the collectability of debts. Factoring companies will perform credit checks on a carriers’ customer before agreeing to factor the receivable. If the factoring company refuses to factor the account, it’s a sign this could be a problem customer. Carriers may want to rethink working with this customer in these situations.

Factoring is a process where a factoring company “purchases” an invoice at a small discount and the factoring company collects on the debt. There are thousands of companies that deal in factoring, but for those within the transportation industry, it’s usually best to choose one that specializes in trucking. They will know the players, giving them an edge in identifying bad risks, and will understand intricacies in your operation that non-specialized factoring companies will not.

There are generally two types of factoring to choose from – non-recourse and recourse. Non-recourse factoring places the burden of collecting the debt on the factoring company. This lowers the risk for smaller companies that can afford unpaid invoices, but it does come with slightly higher fees. Recourse factoring offers lower fees, but if the factoring company can’t collect the debt, the customer must repay the factoring company.

Fees vary by customer and the risk the factoring company must assume with the invoice. Some companies may require you to factor all your invoices while others allow you to factor only the ones you want. TriumphPay, for instance, offers various payment structures, from flat fees to “rates which vary with monthly factoring volume, to rates which combine lower factoring fees with charges based on the net funds employed.”

When it comes time to choose a factoring company, there are a few things you should consider:

Are their fees and rates transparent? Some factoring companies will offer really attractive rates, but insert penalties and other provisions that drive up the final cost.

Is there a contract and what are the terms? Are you required to factor all your receivables, even from customers that pay you immediately? If you have good customers that always pay on time, you may not want to factor that receivable. If there is a minimum contract, is there a termination fee for ending it early?

Consider customer service. Some factoring companies may have a reputation for hardline tactics when collecting invoices. Remember, one of the reasons you may be factoring your invoices is because the customer doesn’t pay in a timely manner. That won’t change with a factor, but that factor’s tactics in collecting the debt will be a reflection of your business, and you may need that customer to keep sending freight your way.

Does the factor have sufficient funding? A factor that hasn’t been in business long may not have resources to pay you quickly, which is the entire point of factoring invoices. That doesn’t mean companies in business for many years are more sufficiently funded, though. Check out online reputations of the factor and ask others if they have had any problems with that factor. You want to be sure you are working with a financially strong company.

Do you have to fax documents? Believe it or not, some companies still require the faxing of documents. This can slow the entire process. You may be okay with faxing documents, but if you are not, be sure the factor accepts digital documents.

Factoring can be a beneficial tool for a small carrier, owner-operator, and even shippers, to help lower costs and maintain consistent, predictable cash flow. But choosing the wrong factoring company can also be a drain on your finances, so choose wisely.

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Brian Straight

Brian Straight covers general transportation news and leads the editorial team as Managing Editor. A journalism graduate of the University of Rhode Island, he has covered everything from a presidential election, to professional sports and Little League baseball, and for more than 10 years has covered trucking and logistics. Before joining FreightWaves, he was previously responsible for the editorial quality and production of Fleet Owner magazine and Brian lives in Connecticut with his wife and two kids and spends his time coaching his son’s baseball team, golfing with his daughter, and pursuing his never-ending quest to become a professional bowler.