Bottom Line
Factoring: Salvation or damnation?

by René Tankersley, feature editor

The factoring industry touts its services as the “savior” of the trucking industry, but some trucking industry folks say it could be damnation for independent truckers who use factoring on a regular basis. Although factoring isn’t a new concept, it may be new to many in the trucking industry.

Factoring, also called “receivables financing,” is actually an old financial service offered by banks to multi-billion dollar corporations for years. Because banks are often reluctant to lend funds to smaller businesses, factoring services recently began making these services available to small businesses.

In order to make an informed decision, do your homework. First, find out everything there is to know about factoring – how it works, where you can get the service, how much it costs, etc. Factoring is defined as “selling the interest in your receivables or invoices to a factor at a small discount.”

Factoring isn’t exclusively for the trucking industry, although some factoring services specialize in purchasing freight invoices. The process of factoring itself is fairly simple. Your company prepares your customer’s invoice and forwards it to the factor for an immediate cash advance. The factoring company then advances your business up to 85 percent of the face amount of the invoices. The factoring company then bills the invoice to your customer and follows up on it to ensure receipt of payment.

Once the factoring company is paid on the invoices, they release to your company the reserved amount of the invoice, i.e. 15 percent, minus the appropriate financing fee for advancing the cash. The financing fee is based not on the strength of your company but rather on the quality of your accounts. The cost fluctuates according to the creditworthiness and performance of your receivables. The fees can be as low as 0.5 percent of the invoice amount, depending on the level of risk involved.

To factor or not … it’s up to you!
Now that you know how factoring works, it’s time to decide whether to factor or not. As with any business decision, there are both advantages and disadvantages to factoring. On one hand, you get your money almost immediately – often within 24 hours. On the other hand, it costs you anywhere from 0.5 percent and up. Of course, money isn’t the only variable, but in today’s economy it’s probably the most important.

When you’re trying to make a decision, everyone has an opinion and wants to share their two-cents worth. To keep it simple, Land Line found two industry representatives with contrasting opinions. Representing the factoring industry is Ken Moore, general manager of United California Discount Corps. Gary Green, conflict resolution investigator for OOIDA Business Services, speaks on behalf of the trucking industry.

Moore favors factoring as a way to allow for company growth and expansion at a faster pace. He explained how some small-business truckers fail to capitalize on big opportunities because they lack the funds to add drivers or equipment.

“Without factoring, the pace you are limited to depends upon the length of time a typical receivable takes to collect,” Moore said. “In the trucking business, I get the reply, ‘Where the hell were you two years ago when I had a good deal but had to pass on it because of lack of funds.’”

Although federal laws require prompt payment from carriers and brokers, Moore says the grim reality is no one enforces these payment requirements. He said, “It’s left for factors to bridge the gap because of the credit terms in the freight business.”

OOIDA’s Gary Green takes quite a different stance on factoring for small-business truckers. He says, “Factoring is like bad drugs. It feels good, but the longer you’re on it, the worse things get, and you can’t survive it.” Green cautions owner-operators to be very careful about factoring. He recommends figuring how much factoring would cost for the entire year. Factoring $10,000 per month at 5 percent would cost an owner-operator $500 per month or $6,000 per year. Even at 8 percent interest for one year, the interest on a $120,000 bank loan would be only $5,263.32.

Green also warns owner-operators to avoid mandatory factoring minimums or long-term contracts, avoid ‘full recourse’ factoring and, as with any contractual agreement, read the fine print. He reminds small-business truckers that there are no laws governing factoring. For those who choose to factor, Green cautions against long-term use of factoring.

“Factoring should only be used for a very short time while building a business,” Green said. “Wean off it as soon as possible. Factoring is not for your everyday expenses, only a tool to be used to grow your business. If you’re going to use factoring for your everyday expenses, you might as well French kiss a rattlesnake.”

Factoring terminology
  • Factoring Selling the interest in your receivables or invoices to a factor at a small discount.
  • Factor The factoring service providing operating capital to the company by purchasing receivables.
  • Advance rate Amount of money provided immediately to the company factoring its receivables. This amount is expressed as a percentage of the total invoice amount, usually 75-95 percent.
  • Discount fee Interest rate charged to the company factoring its receivables. Discount fees are a flat fixed percentage of the total invoice amount no matter how long the shipper/broker takes to remit payment.
  • Reserve or holdback Amount of money not immediately provided to the company factoring its receivables. This amount is expressed as a percentage of the total invoice amount (Advance Rate + Reserve = 100 percent or Total Invoice Amount) and is transferred to your company once payment is received by the factor.
  • Full recourse The company factoring its receivables has an ongoing liability for the factored accounts. If the factor cannot collect on an account, the company factoring its receivables is obligated to buy back the account from the factor.
  • No recourse The factor is completely responsible for the account whether it collects payment or not.
Factoring example
Face amount of client’s invoice
Average discount earned by factor (2 percent)
Reserve fund held for security
Cash advanced to client from factor
Customers payment received by factor
Reserve fund refund paid to client
Cash proceeds retained by factor
(fee is deducted from reserves)