A little catch-up so your invoices don’t get sliced, diced or fried

By Advance Business Capital 

Just What Is This Thing Called “Factoring?”

Before we start, here’s a quick recap of last month’s lesson, which was a definition of factoring. 

• The act of factoring can mean buying or selling.
• The factor is always the buyer.
• If a factoring company factors to you, it buys something you own.
• If you factor to a factoring company, you sell your valuables to it.
• Factoring is not bartering. The factor pays money for what it buys. 

And if you’re a trucker, just what are you selling to the factoring company? Aside from your vehicles or equipment, the only thing you have of value is your invoices. The factor buys what you’ve already billed. 

Why should you sell your future income? Because it’s in the future. You know from experience that it will take your customers 15 to 90 days to pay. Maybe you can wait that long, but many truckers can’t. A factor will pay you immediately for all the jobs you’ve fulfilled, less a percentage. Just how big a percentage depends on a host of variables. For the time being, we won’t go into those. 

The Trouble with Names

Last month we talked about how “factor” is a confusing word. We’re stuck with it though and we’re also stuck with other factoring terms, such as Recourse and Non-recourse. If you’re a newcomer to factoring, those words won’t help you understand what it’s all about.

So why do we use them? For the same reason so many silly things (like odd spelling) endure: custom. The two terms are centuries old. If you’re a factor, they’re useful terms. They define what you can legally do in case the shipper defaults. They don’t indicate their benefits to factor customers. If they were modern terms, they’d probably be called something like “Premium” and “Value,” but those are misleading too, so we’ll just stay with the traditional names.

In a nutshell, Recourse Factoring is less expensive than Non-recourse. That’s because it has tougher terms in case something goes wrong. If you’re a little guy you probably don’t have the capital to make good on a big default, even if it only happens one time in a hundred. If you do have cash back-up, Recourse is the way to go, because in the long run you come out way ahead.

Definition: Recourse Factoring is the sale/purchase of accounts receivable with the option of legal recourse in case of default.

How Recourse Factoring Works

Let’s use an example to make the abstract concrete. You own Fleet Wheels Transport, with fifty tractors and a dozen trailers. It’s the slow season and normally you’d ride it out, but it’s also tax season and it costs less to factor than pay late fees. So you sell a month’s worth of invoices to Crown Factoring, which has been around forever and has a solid reputation. They also offer slightly better terms (you’ve checked around, naturally).

You sign a recourse contract with Crown and it pays you 95% of the value of your invoices (made-up figure, not representative). Usually, factors prefer to deal in contracts that extend longer than a month but it’s the slow season for Crown too.

Uh-oh!

Everything goes as usual except for one debt. You’ve delivered a fold-up Ferris Wheel from Shark’s Bay, Florida to Nub, Nevada. The shipper is Karl’s Krazy Karnival Rides. The days pass: 30, 60, 90 and still no check—not even a word— from Karl. Karl doesn’t reply to emails and phone messages go unreturned. Investigating, Crown discovers that Karl has vanished, leaving bad checks all over town. Somebody’s gotten taken for a ride.

Sadly, that turns out to be you, because if necessary, Crown can sue Fleet Wheels for Karl’s debt. Your contract gives Crown recourse and if Crown has been straight with you and you’ve been reading Factoring 101, you know that risk comes with the lower rate.

Of course, neither you nor Crown want to go to court so you pay Karl’s $5,000 bill. Even with that added cost, you still wound up okay for the month; taxes paid and a little left over. You took a calculated risk, which means the odds were in your favor. Further, you calculated that you could afford the cost of shipper default.  Factoring worked out for you and so did Recourse. Of course, nothing ever goes right all the time. Hope for good news but be prepared for bad news. That’s planning, the one essential for truckers big or small.

Okay, this month’s homily is over. You can wake up now. Here’s your takeaway. 

Takeaway

• Recourse Factoring means the seller (the trucker) is liable for unpaid invoices.
• Recourse Factoring is usually an option only for large fleet operations.

Coming Up

Next month we’ll go into Non-recourse Factoring and why most small truckers favor it. See you next class!

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