Factoring companies

[Manitoba Moose]

Before I begin, I do apologise if this is posted in the wrong section. Mr. Moderator, please move to correct section if not.

Need everyone's thoughts on factoring companies.

Another thread this morning had me thinking about credit ratings and we have seen our credit rating slip from 32 days to 39 days in the last year. Economic conditions do play a major part in this and I do understand some people will say that we're bad business managers and should be paying the trucks faster but, these are the facts (here anyways). We are trying real hard to get back to the 32 days...

We have made it a policy here that we will no longer deal with or pay factoring companies. Their policies and practices make it almost impossible for any small company to attain and maintain a respectable credit rating.

What are your thoughts? Are we wrong in this line of thinking? Are we the only ones that will not deal with factoring companies?

 

[lowmiler88]

I had the same stance a few years back that we pay quick enough that a carrier does not need a factoring company. Then someone in our organization said "if this company has chosen to run his business in this fashion then why would I think I know what is best for them?" Which is very true - just because I think it is a perilous road using a factoring company does not mean it does not work for someone else. I will say as soon as a company that we have been paying directly goes to a factoring company I do watch that company closely as it is a major red flag to me.

 

[Activet]

No need to apologize Mr. Moose, but this is the correct forum to post this.

As a broker, I offer quick pay to any carrier that uses a factoring company. I offer a lower discount than factoring companies because I know the payment habits of my customers and have very little risk, and I could put the money to better use than a factor. That being said, the discount comes right off the carrier's bottom line. In an industry with already severely reduced margins, the discount becomes huge. I don't see this as a viable long term solution for getting operating capital.

 

[alx]

Empirical Evidence

I have yet to see any transport company I know of personally surviving for more than 2 years once they start factoring.

The first one I saw go down real fast was Paquin in Mtl back in the early part of this century.
That has put the fear of factoring into me. I am, as well very cautious, when I have to pay a factoring Co.

Although, as mentionned earlier - to each his own!

 

[AlexAlex]

Lowmiler88,

I believe you are wrong when you insist that when a carrier decides to use factoring services, it is a red flag. Many big companies which used to pay on time with good terms declared bankruptcy which resulted in non payment to the carriers. A big outstanding amount could effect carrier’s operations. Many carriers choose to use cactoring companies to secure their funds and operate with a better cash flow.
I would recommend you take a closer look into that alternative.

 

[whatiship]

There are only 5 ways that I know of to finance your operation.
1. Get a operating line from your bank. However trucking has never been the banks favorite type of client and many are reluctant to get involved.
2. Finance it yourself with your own money. Although it works for me I understand that it is very difficult for most to do so.
3. Use your payables to finance your receivables. This is a terrible habit to get started and usually does not last long. Holding up your payables to create cash flow does nothing more than harm your relationships with your vendors and more importantly it is just not fair.
4. Use your profits. Sounds easy however these days there just does not seem to be the profits generated to make this happen.
5. Use a factoring company. I used to think the same way and the red flag would go up whenever I got that letter in the mail. But I now believe that as long as you only factor certain types of clients and continue to direct bill the ones that pay within terms you can live with it can be a valuable tool.

 

[lowmiler88]

AlexAlex we are in a position to not have to use a factoring company, I've been doing this for a lot of years and it is a red flag because there is not enough margin to give away to a factoring company......if there is my apologies like I said if that is your business plan then that is fine but it is a red flag to me. But what do I know?

 

[whatiship]

Hey lowmiler

I agree but only if someone is using a factoring company for everything, cause you are right there is just not enough margin and you end up giving away your profit.
If you need paid in 24 hrs for everything you move you are probably way under financed and are just one unexpected problem away from disaster.

 

[Manitoba Moose]

I want to thank everyone for their input to this thread but the questions I was asking was referring to credit rating.

I do understand the importance of quick pay to some carriers which is unfortunate that they would have to go that way to stay in business. But that was not the reason for my original questions.

What I was wanting to know is if anyone has made the same decisions as us regarding not dealing with factoring companies. Again, the reason we decided to no longer deal with factoring companies is that because our days to pay has gone to 39 days, they have given us a negetive rating which affects the number of current carriers that deal with us and potential new carriers that would like to deal with us.

39 days is definately a long time but we are no where's close to the 60+ days some of you are talking about.

Does anyone else refuse to deal with factoring companies?

 

[mlar]

We have refused to deal with factoring companies for years and years now.
Our stance is that there just isn't an absolute guarantee that the carrier will not come back to bite us in the behind because they have not been paid. Even if they had, what proof do WE have that they received their money? We only have proof that some company sent us some paperwork saying that they are responsible for some other company's receivables now and we should pay them. So we should? Based on that? They can write any letter saying whatever they'd like and I should just do it?

Have we, as a broker, signed something with the carrier AND the factoring company stating that if we pay the factoring company only and the carrier DOES NOT receive their money, we are still off the hook? No, and no-one is going to sign something like that.

Agreements between the factoring company and the carrier have nothing to do with us and I have yet to see anything that states that we are legally bound to pay the party whom we have not hired.

No factoring companies, ever.

 

[alx]

A little legal mess

Just last year dealt closely with a company that went bankrupt.
We had a good relationship with the bankrupt party and basicly carried out a check exchange twice a month.
This company used a factoring co for their receivables. The last three years we never gave a check to the factoring co. only to the carrier in question.

We were not as quick with our invoicing as they were so ended up behind.

After the bankrupcy we found out that our invoices to them were meaningless, but the trustee wanted their monies. A small duel ensued with the trustee and their collection agency.
We had set a precedent by never having given a check to their factoring co. and this helped our cause.
In the end we settled for less than half of their demand which came out to what we were owed. Thus loosing nothing in the banckrupcy.

Again as I have stressed in other threads, I am always weary when a carrier uses factoring. That 4-5 % monthly charge translates to 48- 60 % per annum.

 

[KeyFactor]

We have made it a policy here that we will no longer deal with or pay factoring companies. Their policies and practices make it almost impossible for any small company to attain and maintain a respectable credit rating.

What are your thoughts? Are we wrong in this line of thinking? Are we the only ones that will not deal with factoring companies?

Manitoba Moose,
I recently started a factoring company in Montreal. I understand some of our terms may be difficult to abide by, but they exist because of the amount of money we have lost through fraud. Many in this thread have only focused on the cost of factoring without considering some of the benefits such as management of receivables, credit analysis and customer collection calls. If I were a carrier, I'd see these tasks as being huge nuisances that take away valuable time from being able to transport loads. Many companies see factoring as a valuable tool that helps them achieve growth they otherwise could not realize. It may not be for everybody, but if used properly, it can be a powerful tool. If used improperly, like other forms of credit, a company can get into trouble.

Just sayin'...

 

[KeyFactor]

As a broker, I offer quick pay to any carrier that uses a factoring company. I offer a lower discount than factoring companies because I know the payment habits of my customers and have very little risk, and I could put the money to better use than a factor. That being said, the discount comes right off the carrier's bottom line. In an industry with already severely reduced margins, the discount becomes huge. I don't see this as a viable long term solution for getting operating capital.

Can you expand on why quick pay is better for the carrier than factoring?

 

[Watchdog]

Not all companies offer quick pay but if you do need factoring call Z&Z Financial Group Inc, they are great to deal with!

 

[KeyFactor]

Not sure all factoring companies work the way you say.

Our stance is that there just isn't an absolute guarantee that the carrier will not come back to bite us in the behind because they have not been paid. Even if they had, what proof do WE have that they received their money? We only have proof that some company sent us some paperwork saying that they are responsible for some other company's receivables now and we should pay them. So we should? Based on that? They can write any letter saying whatever they'd like and I should just do it?

Have we, as a broker, signed something with the carrier AND the factoring company stating that if we pay the factoring company only and the carrier DOES NOT receive their money, we are still off the hook? No, and no-one is going to sign something like that.

Agreements between the factoring company and the carrier have nothing to do with us and I have yet to see anything that states that we are legally bound to pay the party whom we have not hired.

I can't speak for other factors, but when we begin factoring invoices, all three parties (the factor, the broker and the carrier) sign document that assigns the receivable to the factor. In that way, the broker has proof bearing the carrier's signature, that it has sold it's interest in the receivable to the factor, that it instructs you the broker to henceforth remit payment to the factor and that it relinquishes all rights of recourse it may have against you. You don't need any proof that they received any money as long as you can show that you complied with the agreement and paid the company that held legal title to the invoice (ie. the factoring company in this case). The key point in this case is that everyone signed an assignment agreement, so the carrier can't come back to you asking for money when they themselves told you to pay the factor.

You are certainly under no obligation to sign such a document, but if you refuse, the carrier would not get any funding for invoices sent to you, so you're kind of doing them a disservice.

Hope it helps...just my two cents.

 

[Ryancam]

if you are struggling with your cash flow some carriers have no choice but to go to factoring because the banks don't help very much, but once you take the path of factoring it is only a matter of time and your business will close. 5% of the gross on each invoice??? That is very bad, chances are you will last six months to a year

 

[Igor Galanter]

Strongly disagree with a previous post.. It's how you spend the money matters... I know a few brave guys who used factoring at some point , all of them still in business and some successful..

 

[Ryancam]

Strongly disagree with a previous post.. It's how you spend the money matters... I know a few brave guys who used factoring at some point , all of them still in business and some successful..

All the ones I know are closed...it is impossible with such small margins and give away 5 percent of gross profit to last and be successful as you claim

 

[SCAM CHASER]

The law in Ontario is very clear regarding your liability as "account debtor". The PPSA Act reads:

Payment by account debtor
(2) An account debtor may pay the assignor until the account debtor receives notice, reasonably identifying the relevant rights, that the account or chattel paper has been assigned, and, if requested by the account debtor, the assignee shall furnish proof within a reasonable time that the assignment has been made, and, if the assignee does not do so, the account debtor may pay the assignor

So from the time of the shipment until the time you receive notification of the assignment, you can pay the carrier directly. Once you have received written NOA, then you must pay the factoring company unless advised otherwise in writing by the factoring company. The NOA letters that you receive and are asked to sign and send back only confirm that you have received the NOA. If you do not send the acknowledgment back, it doesn't alter the fact that you owe the money to the factor and not the carrier.

If you request written proof of the assignment, and do not receive same within a reasonable amount of time, you "could" pay the carrier directly, but I would not recommend that. Also, many assignment letters state that not only that particular invoice, but all the carrier's accounts receivables have been pledged to the factor, so if you had previously paid the factor on other invoices re that carrier, you cannot claim ignorance regarding a current assigned invoice.

Many account debtors, having chosen to ignore the written NOA, find themselves in Court when the carrier shuts down, owing the factor that assigned invoice, that you chose to pay the carrier directly.

 

[Jim L]

if you are struggling with your cash flow some carriers have no choice but to go to factoring because the banks don't help very much, but once you take the path of factoring it is only a matter of time and your business will close. 5% of the gross on each invoice??? That is very bad, chances are you will last six months to a year

Strongly disagree with a previous post.. It's how you spend the money matters... I know a few brave guys who used factoring at some point , all of them still in business and some successful..

I have to agree - 5% off the top is a lot of money and usually a carrier who is forced to use a factoring company with such high rates does not have a good chance of surviving.

On the other hand, there are carriers who have used this method to free up some cash for asset purchases. Those carriers who plan well and use this method to implement a concise business plan are usually successful.

I always call companies using factoring companies to identify why they chose to factor. If its because they were forced and needed cash I limit my exposure with this company. If they say they built a new building or upgraded their fleet then its understandable.

Either way I think that a carrier who is using a factoring company long term will not succeed - 5% off the top line is a lot of money. Some companies do not exceed 5% profit margin, in fact this article http://www.srr.com/article/trucking-industry-update says that profit for US companies in 2012 only averaged 5% profit.

I have seen another article https://www.ic.gc.ca/app/scr/sbms/sbb/cis/benchmarking.html?code=4841&lang=eng off the Statistics Canada showing better numbers for smaller Canadian companies but these numbers do not take taxes or extraordinary expenses into the calculation.