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Recourse vs. non-recourse...think about it!
Question: for those of you that do non-recourse factoring, what percentage of your invoices are being bought by your factor? If the number is less than 80%, you might get more funding for the same price and have less administration to do if you went with a recourse factor. Example:
Assume $100K of invoices with 80% paying in 30 days and 20% paying in 45 days:
Non-recourse factor won't buy the 20% and will buy the rest for a 7.5% discount. This puts $74.0K in your pocket on day 1 and you collect another 20K on day 45. You have paid $6.0K for this service and you spent time doing collections and calling customers.
Recourse factor buys 100% of invoices with a 15% reserve for a 4% discount. This puts $81K in your pocket on day 1 and another $13K on day 45. You paid the same $6K for this service, but you had access to an additional $7K in funding for the entire period and you never had to do any collections or call customers on past due accounts. How many hours would you have spent on these calls? Could that time have been better spent hauling loads and making more money? If you could borrow the money at a cheaper rate, consider how much would it cost to hire someone to do collections and customer calls.
What if the 20% of invoices take more than 90 days to pay? Makes no sense for the recourse factor to buy them either, so he buys the same 80% as the non-recourse guy. You get $64.8K funding on day 1, another $12K on day 30 and another $20K on day 45. You've paid only $3.2K for this service. The downside? You still have to manage collections on the other $20K.
Which is best? Depends on your situation and needs. If you need more money up front and don't want any administration, go with recourse and sell all your invoices, but remember to set aside that $7K for the first few months to build yourself a cushion. On the other hand, if you want to keep financing costs down and don't mind some admin., only sell the invoices that pay within 30 days to your recourse factor. If you want to pay more and get less, go with non-recourse (sorry if my bias is showing here).
Bottom line: shop around and take the advice of the other participants in this forum on which factors provide the best service and are easiest to work with.
Question: for those of you that do non-recourse factoring, what percentage of your invoices are being bought by your factor? If the number is less than 80%, you might get more funding for the same price and have less administration to do if you went with a recourse factor. Example:
Assume $100K of invoices with 80% paying in 30 days and 20% paying in 45 days:
Non-recourse factor won't buy the 20% and will buy the rest for a 7.5% discount. This puts $74.0K in your pocket on day 1 and you collect another 20K on day 45. You have paid $6.0K for this service and you spent time doing collections and calling customers.
Recourse factor buys 100% of invoices with a 15% reserve for a 4% discount. This puts $81K in your pocket on day 1 and another $13K on day 45. You paid the same $6K for this service, but you had access to an additional $7K in funding for the entire period and you never had to do any collections or call customers on past due accounts. How many hours would you have spent on these calls? Could that time have been better spent hauling loads and making more money? If you could borrow the money at a cheaper rate, consider how much would it cost to hire someone to do collections and customer calls.
What if the 20% of invoices take more than 90 days to pay? Makes no sense for the recourse factor to buy them either, so he buys the same 80% as the non-recourse guy. You get $64.8K funding on day 1, another $12K on day 30 and another $20K on day 45. You've paid only $3.2K for this service. The downside? You still have to manage collections on the other $20K.
Which is best? Depends on your situation and needs. If you need more money up front and don't want any administration, go with recourse and sell all your invoices, but remember to set aside that $7K for the first few months to build yourself a cushion. On the other hand, if you want to keep financing costs down and don't mind some admin., only sell the invoices that pay within 30 days to your recourse factor. If you want to pay more and get less, go with non-recourse (sorry if my bias is showing here).
Bottom line: shop around and take the advice of the other participants in this forum on which factors provide the best service and are easiest to work with.
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I know one company A & A fuel Management they help in Factoring with flat rate with no extra charges, they also provide you with diesel fuel cards and nobody can beat their prices in diesel fuel. The web site is savefuelcost.com.
I was thinking I would open a factoring company for my own use. The logic being that many companys fear that not paying a factoring company in a timely manor will ruin their credit rating, so pay factoring company before paying others would be a priority. In other word's if a slow customer receives a bill from Bubba's Factoring Co, or from Bubba's Freight which bill would be paid faster??? Any thoughts here
It might just work. Years ago at another carrier we opened a phoney collection agency. For the cost of some letterhead, a UPS mailbox and a serious looking website we had one more weapon in collecting old money. It actually worked in many cases. It is interesting how people react quicker when they think they are dealing with a collection agency as opposed to an AR clerk.
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My greatest concern with factoring companies isn't that they report the days to pay.. rather that they for the most part do so inaccurately. I guess I'm one of the very few brokers who keeps really close tabs on payment time lines. I keep track of when the load was booked, invoiced, invoiced mailed/faxed/emailed, when payment was mailed, and when the amount was withdrawn from my account. I'll give you one example.. Load picked up on June 15 and delivered June 17. I received the email invoice from the factoring co. on June 17 and a check went in the mail on June 17. The amount came out of my account June 27. So using my fingers and toes to aid in my counting , I get 27-15= 12 days to pay. And that's from before the load was picked up to when the money came out of my account. The factoring company reported this as 24 days. Yup.. 24 days. So I called them and they told me I should stop fretting about it as 24 days is still excellent.
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Although I work for a factoring company I will try to keep my comments as objective as possible.
There is no lack of factoring companies out there - C.H. Robinson, one of world's largest 3PL's, has 166 approved factoring companies in their database (just google 'CH Robinson approved factors' to get a copy). On top of that there are also many more 'local' factoring companies, some mentioned below, that are not approved. In my experience most 'local' factoring companies are 1 or 2 man shops who have a few hundred thousand dollars in extra money they want to invest, and there is nothing wrong with that. The problem is whether a factor is 'approved' or 'not approved', almost all factoring companies are 'full recourse' - that is if your client doesn't pay them in 60-90 days, you will have to pay back the money they gave you plus accumulated fees.
So why would anyone ever consider anything but 'non recourse' factoring, especially in this market?
Some will say a non-recourse factoring is more expense than full recourse. Is it? Consider this example and you decide: A non-recourse factor charges 3% vs a full recourse factor who charges 2.5%.
Let's say you do 50 runs a year for $2500 each. Your annual factoring fees will be $3750 with a non-recourse factor vs $3125 with a full recourse factor. That's a $625 difference per year. But if you had only one load in 4 years not pay , that is 1 load in 200 loads delivered, then non-recourse factoring would still be cheaper the full recourse. Plus you never have to worry about being charged back on an invoice.
Finally suggestion make sure you are getting at least a 95% advance on your invoices from your factor. I still see transport companies coming to me who get only 75-80% advances on their invoices.
Bottom line: If you are happy with your factor, whether or not they are approved, stick with them. But if you are looking for a new factor you will sleep better if you pick a non-recourse factor.
Drive safe our there.
Gord
JD Factors
There is no lack of factoring companies out there - C.H. Robinson, one of world's largest 3PL's, has 166 approved factoring companies in their database (just google 'CH Robinson approved factors' to get a copy). On top of that there are also many more 'local' factoring companies, some mentioned below, that are not approved. In my experience most 'local' factoring companies are 1 or 2 man shops who have a few hundred thousand dollars in extra money they want to invest, and there is nothing wrong with that. The problem is whether a factor is 'approved' or 'not approved', almost all factoring companies are 'full recourse' - that is if your client doesn't pay them in 60-90 days, you will have to pay back the money they gave you plus accumulated fees.
So why would anyone ever consider anything but 'non recourse' factoring, especially in this market?
Some will say a non-recourse factoring is more expense than full recourse. Is it? Consider this example and you decide: A non-recourse factor charges 3% vs a full recourse factor who charges 2.5%.
Let's say you do 50 runs a year for $2500 each. Your annual factoring fees will be $3750 with a non-recourse factor vs $3125 with a full recourse factor. That's a $625 difference per year. But if you had only one load in 4 years not pay , that is 1 load in 200 loads delivered, then non-recourse factoring would still be cheaper the full recourse. Plus you never have to worry about being charged back on an invoice.
Finally suggestion make sure you are getting at least a 95% advance on your invoices from your factor. I still see transport companies coming to me who get only 75-80% advances on their invoices.
Bottom line: If you are happy with your factor, whether or not they are approved, stick with them. But if you are looking for a new factor you will sleep better if you pick a non-recourse factor.
Drive safe our there.
Gord
JD Factors
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That's unfortunate. Many carriers and some brokers don't realize that factoring companies report to credit bureaus, like Equifax, on how long it takes for brokers and shippers take to pay. This directly impacts the broker's and shipper's business credit rating. We offer our brokers and shippers payment options like electronic fund transfers (EFT), which only takes 1 - 2 days. Is that an option for you?
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Jonny-chicken you raise another good point that many carriers are totally unaware of: Many factoring companies uses the invoice date as the starting point for their fees to accumulate, instead of the date the funds are requested/transferred to the carrier.
If you are already factoring and are not sure when your fees start, you should call your factor. But don't accept a verbal reply, rather print off your statement before call them and get them to show you on your statement which date their fees start. Best success.
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The days 2 pay clock generally starts when the load is booked or when the load is scheduled for pickup. electronic funds transfer is fine, but that really doesn't solve the problem as even with EFT days 2 pay may yet be reported incorrectly. The discrepancy in my days 2 pay as noted in my example below had nothing to do with the mail... nothing at all. It had everything to do with simply reporting the information accurately.
I suspect factoring companies have no interest in showing that any given broker pays his/her bills promptly. Their business, after all, is predicated on paying carriers promptly on behalf of slow paying brokers...i.e. if carriers catch on that a broker pays his/her bills promptly they are less inclined to factor their receivables with that broker. The factoring companies have a vested interest in painting freight brokers as slow paying.. if we all paid our bills promptly the factoring industry would go bust overnight.
I suspect factoring companies have no interest in showing that any given broker pays his/her bills promptly. Their business, after all, is predicated on paying carriers promptly on behalf of slow paying brokers...i.e. if carriers catch on that a broker pays his/her bills promptly they are less inclined to factor their receivables with that broker. The factoring companies have a vested interest in painting freight brokers as slow paying.. if we all paid our bills promptly the factoring industry would go bust overnight.
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While I agree with your opinion regarding factoring companies and their relationship to freight brokers, I think there will always be a place for factoring companies, as there will always be carriers that while good at the actual trucking part, are not so good with the "business" part, i.e. receivables. For some, even a good paying customer - 30 days from receipt of invoice- will be too long. It is important that you control cash flow, and don't let it control you.
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GordOnley, Thanks for the info, but I am not a user of factoring companies... We have had to pay factoring companies many times because carriers we used decided to factor.
What I was talking about was the factoring companies providing inaccurate information to credit reporting agencies like Transunion and Equifax.
I had a problem way back when someone reported me as paying late... I did some research and found it was Riveria Finance... I contacted them and one of their senior managers swore up and down that they did not and do not report to such agencies... I ended up having to prove it to Riviera with documentation from Equifax...
Besides that one specific experience, I have seen several factoring companies seem to have problems reporting these dates accurately to credit reporting agencies...
On a positive note... I've never had any problems with JD Factors...
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I totally agree. Factoring can be a good financing tool for a new or growing transport company or brokerage, but your ultimate goal should be to cash flow your business yourself.
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I hear what you are saying but unlike you most brokers are very much like most companies, that is they are slow payers. When I sit down with a prospective client we will look at their entire book of clients, but the carrier or broker chooses who's invoices they want to factor. If they have a carrier has a broker/shipper or a broker has a shipper, who pays in less than 30 days they typically will not factor those invoices, and we are ok with that.
Whether you are a broker or carrier who factors your invoices it is good to remember that the factoring industry is largely unregulated. That being said there are industry associations for factors, such as the IFA (International Factoring Association) whose members follow a code of ethics. Clause #4 of the IFA's Code reads "Members shall utilize and maintain accurate accounting systems to track each client’s transactions". If you are having problems with a factor not reporting your payment information accurately, you should report them to the IFA. (in reference to Jonny-chicken's comment I checked the IFA's membership list and Riveria is not a member of the IFA)
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That's good advice.. thanks Gord. Funny thing is I had the very same issue with Riviera that Johnny mentioned. That appears to be how they operate. Back some four years ago I had a rash of carriers cancelling on loads shortly after booking. I didn't know what was going on until a nice lady at one of these cancelling carriers told me that I should have a look at my Ansonia credit report. They had me showing at 280 days to pay. No wonder carriers were cancelling.. that cost me thousands of dollars. I contacted Ansonia who advised me to maybe pay my bills faster than 280 days and that they could do nothing. I then contacted my pitbull of a lawyer who got things back on track for me within a couple of days.
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It's unfortunate you had to go the legal route to get that corrected, but at least he got the job done for you.
The problem with JD factors is that they do offer non recourse, but they reject so many customers. I looked in to JD Factors last year and i was told to stay away. We book our loads then very often JD factors rejects the customer. If you could accept more customers credit wise, you would have better success like so many of the local competitors. Even non recourse contracts have clauses that help them charge back their clients, I think you'd be better off offering recourse and getting more customers. I was told by a competitor of Jds that they have lost a lot of their base to other local Factoring companies. Just what i was told but look into it before signing up.
