Factoring is based on the Gross cost needed to move a load. If a driver receives $5000 for a load, he then needs to deduct overhead costs such as fuel, tolls, maintenance, etc. Once these deductions are made, he may be left with 30% or $1500. If the load is factored at 5% that’s $250 or 17% of the drivers, net profit. Such a large cost simply because of a drivers miss-management of cash flow!
Factoring varies company by company, typically the lowest charge would be 2%, but only for the first 30 days. Currently, the lowest charge I have uncovered is a half a percent for every 10 days that the invoice remains unpaid. Flat rates are also offered but these are usually unfavorable if the invoice is to be paid promptly.
Factoring, where does all the money go? What is the real cost?
Factoring fine print needs to be scrutinized as it can bamboozle even the most experienced CEO or banker. When you receive payment and see the hidden fees associated with the so called 5% factoring agreements, these fees can quickly add another 5%. $500 on the above-mentioned example, 33% of the net profit! Hello!!
Another costly cash flow issue that can blindside a driver is the failure to have a payment sent to the factoring company that holds the receivable. This is now not your money and it should be made perfectly clear where the payment should go. If overlooked, then late penalty fees will kick in and the factoring company could bill the trucking company for additional costs.
Factoring should always be avoided and only be used as a solution to short term cash flow situations. Factoring can be used as part of the cash flow solution but by all means not the entire solution. If needed it is advised to take the time in vetting the factoring company beforehand, so that when needed you know just who you are dealing with. Once bitten, twice shy! Longer term needs should be solved with other financial vehicles like small business loans and other tools that a banker has in his toolbox, all offering much better solutions to your cash flow challenges. A credible factoring company will have these tools available as well. Check here for factoring companies that offer these one stop tools.
Reputation, percentages, transparent fees, time to pay, communication skills, financial resources are all factors that a Factoring company should have good grades on. Typical code of ethics can be looked into at the International Factoring Associations website.
Another issue to pay close attention to is recourse and non-recourse factoring. Recourse factoring keeps the collection responsibility as the trucking companies’ responsibility. If collection fails, then the trucking company will have to repay the factoring company. Non-recourse factoring is the exact opposite although will usually include higher fees related to the higher risk of collecting. If a factoring company fails to collect the debt it is 100% their loss.
As with factoring companies you should choose your customers wisely vetting them with a credit check. Factoring companies will do this and raise a red flag by just not accepting the invoice. Always pre consider factoring rates in your initial quotes marking them up if there is no other choice but to factor.
In summary do your homework ahead of time so that you can avoid any factoring pitfalls and unnecessarily erode your bottom line.