Curiosity compels me to ask ...

Michael Ludwig

Michael Ludwig

Well-Known Member
Jul 6, 2009
1,901
2,736
113
63
Simcoe, ON
20
I'll be completely honest and above board ... I know next to nothing about factoring companies. About all I really know is that you pay someone to front you your receivables value, however if you have long running or questionable receivables, you take all the risk, not the company that is fronting the receivable for a fee.

What business model would warrant the use of a factoring company?
 
Although I am sure the factoring companies would disagree, the only business model that benefits from using a factoring arrangement, is one that is either under funded, under staffed, or both. In a perfect world, companies would pay their invoices immediately upon receipt, negating the need for a factoring company. However, the reality is the majority of companies pay in 30 days +/-. This means a supplier must have approx. 30 days worth of cash to satisfy their obligations while waiting for payment. In addition, managing receivables requires someone to perform that function, an added cost. I guess the decision to use a factor is dependant upon how effective one's cash flow management is and if they can afford the extra staffing expense.
 
Last edited:
  • Like
Reactions: Igor Galanter
I run into quite a bit of them. It seems that many trucking companies seem to rely on them. Some are more aggressive than others. i hope they pay carriers as well as they collect from customers.
 
It's my understanding that the percentage depends on a number of things, such as, volume of invoices tendered, credit worthiness of the customer, etc..I can see where the convenience of receiving your payables quickly could help a carrier get over a short term cash crunch period, but to use a factor as your main source of receivables seems too costly in a low margin industry like transportation.
 
I have no idea how a company could afford to use a factoring company. We are a small company. I have never felt the need to use one. I will pay myself to work the extra hours if need be, before paying for a service to do so.
 
Most of the companies that lease their vehicles end up doing this. It's in there best interest to make sure their critical loans are paid rather than lose 1-2 percent on their margin.

I understand it as I've worked for a large company and small and depending on debts you have accumulated it directly affects your ability to make these decisions.
 
For a smaller company, it would just take one unforeseen and catastrophic incident, like a motor blowing or something. Often in those situations, you might need cash rapidly to pay the bill. I do agree that it is difficult to get out of a situation like that though...
 
loaders said:
Although I am sure the factoring companies would disagree, the only business model that benefits from using a factoring arrangement, is one that is either under funded, under staffed, or both. In a perfect world, companies would pay their invoices immediately upon receipt, negating the need for a factoring company. However, the reality is the majority of companies pay in 30 days +/-. This means a supplier must have approx. 30 days worth of cash to satisfy their obligations while waiting for payment. In addition, managing receivables requires someone to perform that function, an added cost. I guess the decision to use a factor is dependant upon how effective one's cash flow management is and if they can afford the extra staffing expense.
Click to expand...

I won't disagree completely; the reality is that few companies pay in 30 days and yes, there is a cost to manage receivables. I would argue that for a smaller carrier with limited resources, you could build more value by securing and delivering loads than you could by spending time on the phone collecting receivables. IMHO, that is the most important question to ask...does factoring permit me to grow my business much faster than otherwise possible? If so, the benefit will likely far outweigh the cost. If not, it's probably not worth it.
 
You must log in or register to reply here.
Top Bottom