Factoring
- Thread starter flattop40
- Start date
flattop40
Expert Expediter
Some really good responses. I appreciate all who commented. I guess my thought, however, was a carrier who had to factor was trying to grow too fast and didn't have the money to cover. So lets do the math. If it takes on average 30 days with the exception of the occasional up to 90 and the average driver runs 1500 miles per week at say an average of $1/mile (this is all for easy math) you would need $1500 x 4.3 which equals $6450. Build in some cushion and bring it up to $10,000 per van/sprinter O/O he has running for him. Don't get me wrong, for larger trucks you have to have more but this is just for discussion. So my point is you don't need a HUGE amount banked per truck. As the carrier grows so should his assets. As many have stated "its all part of the cost of business." But in todays world it has become common business to rely on others money and not build a sound stable business themselves. IMHO a carrier should not add another truck until he knows he can cover the additional truck for at least 45 days. Just my 2 cents in a bucket of quarters. 
In our experience, it was rare to be paid within 30 days. On top of that, you might be surprised to know which companies consistently take the longest to pay. If a new carrier hopes to continue doing business with some of these well known companies, that is just how it is. Your math might look like $10K per van per month x maybe 2 or 2.5 or 3 months, and the odd one maybe 1 month.
Larger carriers use their bigger and better cash flows to their advantage. Perhaps it isn't like this for others, but what I saw in many cases was a choice when billing other carriers, to either pay their quickpay percentage (instead of using factoring), or wait maybe 60 days or so for the regular payment flow. The payer might even say they pay in 30 days, but that might be based from the date the payer receives the original paperwork, and gets it in their system.. if some require 'original paperwork', that is a choice between snail mail, or courier.. in my world, a courier could be another $30... or another 10 days.. then when the cheque is issued on the other end, if they mail it.. that can be another 10 days..
Also, let us hope that a carrier is charging and receiving more than the dollar per mile. Whatever the carrier is getting on a load is not only how the carrier gets the revenue to pay the driver/OO, but also how the carrier gets the revenue to pay allll the other expenses that come with being a carrier, like communications expenses, load boards, permits, signage, forms, office assistance, computer software, hardware, networking, subscriptions, memberships, etc. Although a driver/OO may only have to pay insurance monthly, a carrier may pay the bulk up front and then deduct it from their drivers monthly. A carrier has many bills to pay aside from just paying the driver, and many things need to be paid up front, unlike for a driver working under a carrier.
The fact that a carrier may use a factoring service or any other kind of line of credit is not different from any other business trying to deal with cash flow issues of paying their bills vs receiving their revenue. Every business is different in their needs in that regard. What is different is that trucking doesn't have a stellar financial reputation to begin with, and banks aren't chomping at the bit to cover receivables over which they have no control.
Factoring is specialized for the industry and they charge for it. They know the players, they have access to all the company credit ratings and financial stats, and in fact, many times the factoring company won't cover the company a carrier wants to do business with. For those companies, the carrier is on his own if he wishes to do business.
One might be surprised at who is on that 'don't-touch' list. The 'don't-touch' list isn't always for non/late-payment issues either, it can be for other reasons, such as some companies refuse to deal with factoring co's, or a company may not have enough history, or a company may have gone through a bad couple of months and screwed up their ratings.
And don't forget about the glitches along the way, like perhaps a company ends up not paying at all until they're taken to court, or a carrier may front some money to a driver for repairs or deductible, and then bill the driver monthly for reimbursement.
In a perfect world the banks would look at a great business plan and just say, 'ya, here's a three hundred thousand dollar line of credit, best wishes for your success'. They are more apt to do that after a few years of tax returns, and proof of worthiness, something a new carrier doesn't have yet.
If a driver is trying to determine whether or not to do business with a small carrier, whether or not the carrier factors should not be a stumbling block. In fact, it shows the carrier realizes that things may need to be paid out before the money comes in, especially after they really get going. If a carrier has put measures in place to deal with this at his expense as a cost of doing business, great. It also doesn't mean it is the carrier's only option, however the more money a carrier factors, the better rate the carrier will get. Money is money, and a driver should only be concerned with getting paid as per his contract, no excuses.
The 90 day payer I know of is NLM...there maybe more but most of the larger Alliance members are 30-60...There are probably some brokerages and a lot of small carriers 90 plus if an individual operator knows this then they can limit the amount of loads they do for them...Iknow one member here can only afford 2-3 NLM loads a month....the bulk are Panther and Fedex as he gets paid in 30 days or less...
Jefferson3000
Expert Expediter
PJ is right. There aren't many Gold Book shippers and brokers, especially in expedite. It is the rare customer that consistently pays in 30. I could name a few companies that have advertised on here that, although they seem large and solvent to you, are all above 90 days to pay, and therefore have a credit score that is in the toilet. No one will factor these companies.
Also, you may figure in the pay to an owner operator per month as the only expense that the carrier has, but it is far from over. There is a lot of overhead in running a trucking company that goes beyond the driver. Let's say that Joe Buddy Expedite will need 1 staff member per x amount of trucks. They are generally paid on a weekly or bi monthly schedule. Bigger company means bigger office and more electricity as well.
These days, 45 is the new 30 when it comes to collecting bills. Even large carriers operate with revolving credit at times. However, if you are a new company, every board member and their spouse better have a credit score of 750 or you will not see any lending. Forget corporate credit. No one has corporate credit when they start and the officers are usually required to back it up with personal credit. Also there are not a lot of trucking companies that are seeing their credit lines increase. If anything, the banks are having them decreased.
I am sure that there are exceptions to the rule, but profit margins are also not near as good as they were the last time fuel hit 4 bucks a gallon.
Also, you may figure in the pay to an owner operator per month as the only expense that the carrier has, but it is far from over. There is a lot of overhead in running a trucking company that goes beyond the driver. Let's say that Joe Buddy Expedite will need 1 staff member per x amount of trucks. They are generally paid on a weekly or bi monthly schedule. Bigger company means bigger office and more electricity as well.
These days, 45 is the new 30 when it comes to collecting bills. Even large carriers operate with revolving credit at times. However, if you are a new company, every board member and their spouse better have a credit score of 750 or you will not see any lending. Forget corporate credit. No one has corporate credit when they start and the officers are usually required to back it up with personal credit. Also there are not a lot of trucking companies that are seeing their credit lines increase. If anything, the banks are having them decreased.
I am sure that there are exceptions to the rule, but profit margins are also not near as good as they were the last time fuel hit 4 bucks a gallon.
Jefferson3000
Expert Expediter
NLM is a decent payer. See my last posts when it comes to some of those Alliance members you refer to.
Is having your own authority really worth it these days?
Wouldn't the margins be better with a reputable carrier?
And factor in the aggrevation factor as that has an emotional cost...
Jefferson3000
Expert Expediter
Could be. But some of us just like running our own companies. Who are these "reputable" carriers you speak of? How and why are they reputable? Fame or size? EO advertising? We may be small, but we are considered quite "reputable" by the patrons we serve. They put a lot of confidence in us to solve their problems. Many times bigger just means having more shells to hide your one nut under. They just keep shuffling.
Whether they be big or small, whether they advertize here or not....reputable would be a generic term...based on an individuals dealing with them...
This is an excellent discussion on factoring. I am new to EO and have recently started a factoring business based in Montreal, Canada.
I agree with the comments that factoring may not be for everyone. That said, it is definitely short-sighted to only look at the cost of the service without considering the benefits of how much simpler your life can be. Many of the most important benefits are not provided by your local bank, so you are getting far more than just quicker access to your collections. Do you really want to chase after companies that are supposed to pay in 30 days and often end up paying in 45 or 60 days? Do you like making those calls? Shouldn't you be focusing more on generating more revenue and leave it to us to make sure cash flow is not holding you back?
I've worked in large public companies that generated billions of dollars in revenue and had Fortune 500 companies as their clients, but that didn't mean everyone paid on time. In my last job, the actual collection period was more than 50 days, which is more than 20 days past our standard payment terms. It's hard to run a business when customers stretch your cash flow that way. Do you know how the last employer financed itself? You guessed it....factoring!
Love to hear more...
I agree with the comments that factoring may not be for everyone. That said, it is definitely short-sighted to only look at the cost of the service without considering the benefits of how much simpler your life can be. Many of the most important benefits are not provided by your local bank, so you are getting far more than just quicker access to your collections. Do you really want to chase after companies that are supposed to pay in 30 days and often end up paying in 45 or 60 days? Do you like making those calls? Shouldn't you be focusing more on generating more revenue and leave it to us to make sure cash flow is not holding you back?
I've worked in large public companies that generated billions of dollars in revenue and had Fortune 500 companies as their clients, but that didn't mean everyone paid on time. In my last job, the actual collection period was more than 50 days, which is more than 20 days past our standard payment terms. It's hard to run a business when customers stretch your cash flow that way. Do you know how the last employer financed itself? You guessed it....factoring!
Love to hear more...
One can not really know which companies are 'reputable' until one deals with said companies. The ones that turn out to not be so 'reputable', can devour one's cash flow; hence the need for factoring.
I have heard (and I believe, even without pictures) of companies (not trucking) going bankrupt because they dealt with huge, 'reputable' companies, who abused their cash flows and sunk them. It's really sad.
Look on the BRIGHT side. GM & Chrysler were Factored by the US & Canadian governments. And as far as at least GM is concerned the Government is going to take a bath at GM.
That's for sure. One of my former employers ultimately filed for bankruptcy protection due in part to large clients that did not respect their payment terms. Among the worst abusers were the large stable companies that knew they could pay when they wanted to pay and we would do nothing if they paid late. Some even took early payment discounts and paid late! In that sense, even though we had sales of billions of dollars, we were at the mercy of our clients, much like any small o/o.