Tips from the experts

B4T Staff Writers

First, factoring isn’t a new idea. Some financial experts date the concept of factoring from Hammurabi and his Code of 282 laws, carved in cuneiform onto a pillar placed where the literate people of Babylon could read and follow them in their daily lives. Many of his laws and the practice of factoring have continued through the ages, including the merchants who supplied goods brought across the Atlantic to the Colonies, then the garment district in New York City, and the modern-day use of factoring, primarily to maintain cash flow or grow a fledgling business. (Although the March 31, 2008 issue of Fortune magazine–before the Great Recession hit–noted that Target was negotiating the sale of half of its credit card receivables, asking around four billion dollars. And Target Corporation is no fledgling company.)

 So what is modern-day factoring; in particular, transportation factoring, and what can it do for your motor carrier? 

Here are some quick tips from experts: Jeffrey Colburn, of XFactors, Massachusetts; Steven J. Hausman, Advantage Business Capital president, Texas; and Chad Wulf, vice president with Carrier Finance Group, South Dakota. All of their companies have been in business for many years and all specialize in transportation factoring. In addition, their companies have accessible websites and each is a member of the International Factoring Association, a self-policing and regulatory organization. 

How does factoring work? 

Colburn

You sell (assign) your rights to invoice your customer to a third party (the factor) and you immediately receive a discounted payment. Think of factoring as slightly similar to a credit card transaction. The merchant is paid a discount of the transaction amount when goods or services are provided. So, you are the merchant, the factor is the credit card company. Your customer gets the benefit of the time to pay the credit card company. Terms and conditions apply with the use of the credit card. And terms and conditions apply to factoring and this story will tell you what to watch for when looking for a reputable factor company. 

Hausman

Factoring is the cash sale (and purchase) of an invoice, typically at a discount; a form of commercial finance that provides working capital, primarily to people who cannot borrow money from banks. With trucking, you have a lot more Out-Go than In-Come.  Almost all of the costs to operate a truck are paid in advance of delivering the load: fuel, drivers, insurance, equipment payments, etc. Typically, freight bill invoices are paid 30 to 45 days after delivery. Factoring is an alternative source of financing that eliminates many of the traditional lending criteria that are difficult for small-to-medium companies to meet – i.e., years in business, CPA prepared financial statements, leverage ratios, etc. Factoring is also more stable than bank financing, particularly for businesses which may experience a few bumps along the road. Factors can look beyond the financial condition of the borrower to the creditworthiness of the borrower’s customers.  

Wulf

 The best thing a trucker can do is utilize their factor as a tool, to run their business more efficiently. We tell all of our clients, we know you don’t want to factor forever, so in the time we have together let’s establish a good working relationship and grow your business to the point where you can self-fund or get yourself the option of going to a bank to get a line of credit. 

There is obviously a fee to factor your invoices, but utilizing your factoring company as your back office and taking advantage of your factor’s value-added services allows most trucking companies to concentrate on what they do best, moving freight without the worry of billing, collections, reports, and most important cash flow. 

Obviously, there are truckers who have had a bad experience with factoring, whether they dealt with a bad factor, or realized it wasn’t exactly what they thought it would be. When looking for a factor, ask for references, and actually talk to them to get a 3^rd party perspective. Also, make sure your factor is a member of the International Factoring Association (IFA), this body provides factors with training and also monitors the business practices of their members. Unfortunately there have been factors kicked out of the IFA for unethical business practices in the past, and I’m sure it will happen again, but these things can give the truckers peace of mind, knowing they are dealing with a reputable company.