Is Factoring the Right Fit?
Factoring Companies are an increasingly common presence in the Freight World, it seems like every Carrier uses one. But, you would be surprised to know that I see posts and questions all the time asking if Factoring is worth it or what company to use. So if you are thinking about using a Factoring Company, or switching to a different firm, this article is for you.
What is a Factoring Company?
The short answer is: a Factoring Company helps a client get paid faster, usually the same or next day, rather than waiting the common 30 business days before seeing payment on a load carried. While some brokerages and shippers do offer Quick Pay options, sometimes it may not be the best route to choose if it is available at all. Because of this, many Carriers opt for the help a Factoring Company provides.
Generally speaking, the process of Factoring goes like this:
1. The Carrier submits an invoice for the load that they have carried for a client. This usually involves basic details of the load and route along with a relevant Rate Confirmation and Proof of Delivery (Bill of Lading).
2. The invoice is reviewed by a representative to insure quality, and all information needed has been given.
3. A previously agreed upon percentage of the total linehaul (agreed upon in the contract) is advanced to the Carrier, while the Brokerage or Shipper pays the Factoring Company at a later date.
So, you might be thinking, “Is this right for me?” Well, if you don’t want to, or cant, wait to see your money in a month’s time, then yes, it is quite possible that a Factoring Company is the right choice for you. If you have decided this, the next thing that you need to consider is choosing the right company to fit your own.
Here are some things to look for:
If you do a quick web search for “Factoring Companies,” you’ll soon find that there are many different industries that use this type of service. So you’re first item of business is to weed out the ones that have no relevance to you line of work. For instance, a Medical Factoring Agency wouldn’t be much help to a client in the Freight Hauling Field. Adding “Freight” to your web search generally does the trick.
Because a Factoring Company basically fronts the money owed by the Broker or Shipper, there are two words that you need to pay close attention to: Recoursed and Nonrecoursed.
Recoursed Funding means that the Carrier assumes all responsibility if the debt of the Broker falls through and is not paid, meaning you have to pay it back. Nonrecoursed Funding means the exact opposite, the Factoring Company covers you if the Broker or Shipper never pays up.
Nonrecoursed Funding, of course, sounds like the best option here. Unfortunately, there are not all that many firms out there that offer that particular perk. If you do find one that matches your criteria and offers this perk, do not be surprised if the charged percentage is higher to cover this type of funding.
Now, Recoursed Funding is still a totally viable option, not only because the rates are usually lower, but because Factoring Companies offer an extremely handy tool as a first line of defense against failed repayments: The Credit Check. I have yet to come across a company that does not offer at least some form of this service. Most companies have approved and unapproved “debtors” (Shippers and Brokerages) that they will or will not work with. If approved, generally they have a good credit history and follow through on their debts, and unapproved, well, don’t. Checking the credit of a Brokerage or Shipper can greatly decrease the chances of a payment falling through, and if a client under Recoursed Funding, can save you from having to pay that debt back yourself.
I have seen great rates as low as 1%, and I have seen not so great rates as high as 7%, but make sure you are reading the fine print, not just the percentage. In many cases, with low rates, you’ll find hidden fees that make the money up in the long run. Anything from wiring fees to invoice submission fees may be described in your contract, so keep a keen eye, sometimes that 4% saves you more money than 1%.
A great benefit Factoring Companies may offer is the Fuel Card. These cards can do many things, like get fuel rebates yearly, even sometimes discounts. In many cases they can be used for whatever you need, not just motion lotion. This could even be a solution to a company credit card as, if you’re a fleet owner, it could allow to track the spending of company drivers.
Having the right Factoring Company in your corner could very well be an enormous asset to your Company’s Cash Flow, as long as you’re careful in making sure you find the right fit. You can get your earned money faster, rather than a month later, and have the added bonus of finding Brokerages and Shippers with honorable payment histories.
Are you looking for a Factoring Company?
Give us a call, and we’d be glad to get you in touch with a great representative!