Healthy, Wealthy Trucking

Healthy, Wealthy Trucking

Accutrac Capital 0 Comments

Trucking Factoring

Given the nature of the business, the transportation industry is never without challenges. At times I think this is what makes it so fun. The recent part, however, has brought a mix of challenges which amount to a perfect storm. High fuel prices, a weak US dollar and dropping freight volumes have all but decimated the profits of even the best businesses. Now there is a new obstacle to add to the mix… a credit crisis.

The recent collapse of the US housing market has put a severe strain on the banks and other financial institutions. Combine this with the already existing transportation industry problems, and the likely response you will get from the bank when looking for money is … “no” (most will be polite enough not to say “are you crazy?”. So what do you do when the answer is no? One option you may want to consider is Factoring.

What is factoring and how does it work?

Invoice discounting, or factoring has been around in one form or another since Roman times. A factoring company will purchase your freight invoices (accounts receivable) at a discount (an amount less that the invoice). The factoring company will advance you from 80 to 95% of the value of the invoice immediately after you deliver your load and send them your paperwork. Your customer will pay the factoring company instead of you. The factoring becomes responsible for collecting the money for your invoices.

Once the factoring company is paid, you will receive the remaining fund, less a fee. The amount of the fee usually depends on the length of time it takes for the invoice to be paid.

The process looks like this:

  1. Your customer places and order – (this could also be a carrier if you are an owner operator).
  2. You move the freight.
  3. Invoice along with a signed bill of landing and any corresponding paperwork is sent to the factoring company.
  4. You receive up to 95% of the invoice total from the factoring company.
  5. Invoices are mailed to your customer after they are stamped with a message to inform your customer they need to pay the factoring company directly for the invoice.
  6. Your customer remits payment to the factoring company who will process the payment.
  7. You receive your final payment from the factoring company less a discount fee.

How much does it cost?

Every business is unique and the cost of factoring ranges from company to company. The biggest determinants of cost are the size of your company and the credit worthiness of your customers. Typically the cost of factoring increases the longer is takes for your customers to pay their bill.

What to do when the Bank says “No”

The charges can range from 1.5% - 5% of the invoice amount for every 30 days the invoice goes unpaid. The charge can also be calculated on the amount advanced instead of the invoice.

To illustrate, if you are paying 3% of the advance amount for every 30 days, on a $1000.000 invoice, and your advance rate is 90% on an invoice paid in 30 days.

  1. Advance amount is $900 (90%)
  2. Discount Fee - $900 x 3%
  3. Total discount fee $27.00
  4. Upon payment by your customer you receive a further $73 ($1000-$900-$27)

To illustrate, if you are paying 3% of the advance amount for every 30 days, on a $1000 invoice, and your advance rate is 90% on an invoice paid in 45 days.

  1. Advance amount is $900 (90%)
  2. Discount Fee - $900 x 4.5% (3% for the first 30 days and 1.5% for additional 15 days)
  3. Total discount fee $40.50
  4. Upon payment by your customer you receive a further $59.50 ($1000-$900-$40.50)

What are the Pros and Cons?

As illustrated in the examples above, one of the biggest drawbacks to factoring is the cost. Bank financing is much cheaper than factoring. That being said, factoring does have its place and can provide many advantages.

Since factoring companies concern themselves with your customers’ credit, their interests are aligned with yours. Factoring companies can act like your credit department, performing the necessary credit checks on your customers. This can give you a certain amount of reassurance in these challenging times. Factoring provides you with an easy source of capital. As your sales increase so does the amount of money that you get from factoring company. It is the only type of financing that provides immediate response to changes in your sales. Factoring is also a relatively easy source of funds. Most factoring companies do not require you to provide monthly or quarterly financial statements and complex borrowing calculations.

For small fleet or a trucking company, it enables a company to pay bills when accounts are slow to pay. It can also act as your account receivable department, enabling you to focus on hauling freight and nor managing this part of your business. Keep in mind, though, that this comes at a cost. At the end of the day factoring can be a feasible and simple solution to your financing requirements, as long as you are aware of the associated costs.

I welcome your feedback; please don’t hesitate to drop me a line on this idea.

Andrew Duckman, BA., GBA Candidate, RIBO (Co-written by Charles Sheppard President, Accutrac Capital)


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