Transportation Factoring - What's So Special?

"At Teams R US, we are well aware of the meaning of team work. Without their help, none of our dreams could have come true."

Joel Diaz, Teams R US (T.R.U.E.)

Factoring, or the cash sale of accounts receivable, has been around 4,000 years dating back to the Mesopotamian King Hammurabi. On this continent, merchant bankers factored the sale of cotton, furs and timber from the early colonial settlers. So, with hundreds of finance companies out there, what’s the big deal with factoring accounts receivables from people who live, eat and breathe only trucking?

It all starts with credit.

Credit is the borrowing capacity of an individual or company. In trucking, credit is specifically needed to fund growth, manage cash flow and survive the steep cycles of the transportation economy. Banks generally provide credit based upon the borrower’s income, cash flow and assets, utilizing a typically inflexible set of criteria:

Minimum 3-5 years in business.
2-3 years of positive cash flow.
Available assets at least equal to the loan amount.
Available personal assets equal to the loan amount.
Clean and strong credit history.

Receivable Factoring - an Alternative Source of Credit

Freight Factoring, as an alternative source of financing, eliminates many of the traditional criteria that are difficult for small-to-medium sized trucking companies to meet. Traditional bank lending criteria include number of years in business, ratio of invested capital to borrowings, profitability and cash flow ratios. Factoring arrangements are inherently more stable than lending facilities as Factors can look beyond the financial condition of their clients to the creditworthiness of their clients’ customers. Most factoring clients also benefit from substantial cost savings in not having to establish their own credit, collection and accounts receivable departments.

Factors provide credit (cash) based on the quality and liquidity of their clients' accounts receivable. Because each account is evaluated individually, a Factor is enormously more flexible in responding to increases in sales. By looking primarily at the quality of the accounts and the credit worthiness of the customers, financing can be provided even if the company is new, the credit history is weak, or cash flow is a little tight.

Unlike traditional bank loans or financing, factoring offers:

No lengthy applications
No compensating balances requirements
Little or no ongoing financial reporting
Credit lines that grow with your business
New companies are acceptable
Credit problems generally no problem
High advance rates
Short approval process

What's Special About Transportation Factoring?

It starts with the collateral – freight bill invoices and documentation. For a factoring arrangement to work well, the Factor has to become an extension of their client’s company – an outsourced credit and collections department. In many ways, the Factor needs to know their client's business as well, if not better, than they do. For example:

Invoice documentation requirements by shipper
Best practices for incorporating truck stop scanning and electronic invoicing
Appropriate credit lines by shipper
Strength and stability of freight brokers and 3rd Party intermediaries
How to increase fuel card credit lines
Ways to simplify fuel card disbursements
How to maximize sources of credit for truck and trailer financing
How best to integrate the full menu of TruckersB2B service providers

Freight Bill Factoring is not only a source of capital, but a potentially invaluable partnership for the client. However, the most stable, flexible and plentiful sources of funds will always be from those financial services companies that are most dedicated to the businesses they serve.