Factoring & Payments
Factoring Companies can definitely take your companies performance to a different level and it can definitely hurt you just as bad. Some things can go wrong with one broker/customer or a brokerage/customer can even go underwater and mess up other relationships in your business that don’t even connect. Use this sheet as set of rules to select the correct factoring company.
What is factoring?
- Factoring (also called discounts) are is the process of selling your invoices to a financially sound corporation at a discounted fee “1-4.5% more or less” in exchange for the speed of receiving the funds instead of waiting the original net term from the invoicee.
Why use factoring companies?
Some brokers and customers do not have the ability in their business model to pay a carrier sooner than the company standard Net Payment term of days. Some companies may have a Net Pay Term of 7, 18, 30, 60, or even 90 days. The best way to mitigate that crunch on cashflow gave birth to the factoring company. Factoring companies can present a standardized discount/factoring rate and help shrink the cashflow burden down from 90 days all the way down to a couple of hours.
How do I choose a factoring company?
It’s best to take the POSITIVE advice on anything in trucking. Too much bad news can come from trucking communities. Its best to find a factoring company with dedicated account reps, seasoned teams, clear terms, clean systems and dedicated accounts receivable teams driven to be excellent!
Don’t work too heavy with one broker/customer so much that it becomes a danger to your freight portfolio. We recommend no more than 60% of your freight should come from a single source. If you can find comfort in knowing the payment to chargeback ratio is safe and it makes enough sense to base your constant freight ratio on this one customer and product, look to diversify.
There are two different types of factoring contracts that a provider is going to attempt to sell you! Let’s walk through them and explain how much they differ (they really don’t differ much at all if the job is done right). Please note that this below information is not legal advice and each company official is responsible for their own decisions. This information below is the recanted perspective of decades of industry experience to be taken as an only an opinion. It is the sole responsibility of each Motor Carrier to make sound decisions to match your company risk profile.
Recourse Factoring
With Charge Backs
Normal Rates
1% to 3% of each invoice. This comes out to about $3000-$9,000/year per truck at $300,000 annual revenue per truck.
The plot of the 1-3% rate is the idea that you assume majority of the risk. The fear your being sold here is that the industry will constantly be in a mode of instability and so will your partners. Protection comes at a cost yet the practice of protecting yourself can come with a surety bond claim against a brokers insurance policy. No factoring company is going far enough to file for a surety bond claim for a carrier because it isn’t their responsibility. You can protect yourself and receive 100% of all payments as long as you run interstate trips and find good relationships for intrastate that will pay out!
Non Recourse Factoring
No Charge Backs
Normal Rates
2.5% to 4%. This comes out to about $7,500 to $12,000/year per truck at $300,000 annual revenue per truck.
The plot of the 2.5-4% rate is the idea that you assume none of the risk! But actually it’s not true. There is a thing called “blue chip” brokers/customers that are required to pay because their companies are so big. Companies like Total Quality Logistics, RXO, or Target. This restricts you from new opportunities with smaller companies and keeps you away from being diverse. You’re essentially being charged a higher rate for the factoring company to reduce risk and sell you fear to something that has low risk of happening.
The biggest thing to do to protect the business and separate liability if you decide to do either program of factoring is to ensure you handle loads with care, turn in paperwork directly to the broker/customer the moment the load is done and learn how to protect yourself with surety bond claims in the case of financial disagreement.
Please note that Surety Bond Claims against broker authorities are only honored on interstate trips.
Don’t lose out on hundreds by being blinded on QuickPay theft by factoring companies. Lots of brokerages have a QuickPay option that allow for you to be paid directly through ACH/wire and sometimes even Zelle.