What to Consider When Choosing the Best Factoring Company
What’s your rate? It’s usually the first question asked when starting a conversation with a factoring company, after all, it is one of the most important items when considering a factoring proposal. Well, yes and no. Freight factoring is a crowded industry. There are multiple companies to choose from, a countless number of services provided, and differing terms that can make or break your trucking company in the long run. With so many options out there for carriers to choose from, how can a factoring company differentiate themselves? They can make the answer to ‘What’s your rate?’ seem like too good of a deal to pass up. However, when choosing a company to entrust with your business’s finances, such topics as what type of program is best for me, what am I paying for and what risk is involved, are important conversations to have.
What Type of Program is Best for Me?
We need a whole different post to cover every program type, but I’ll give it to you quick. We are going to focus on non-recourse factoring programs. You have flat rates and tiered rates. A flat factoring rate charges a percentage off the total invoice amount, and pays you the rest, period. Tiered factoring rates start low, and when I say low, I mean below 1% in some cases, and increases the longer it takes the broker to pay the factoring company.
A dead giveaway for tiered rates that are billed as “flat rates” is if the factoring company is holding a reserve. Non-recourse has no need for a reserve, so they are keeping the money for something. “If a broker pays in 30 days your rate is 2%”. You might think, “Awesome! I am only going to work with good paying brokers, so I don’t need to worry about that.” But wait, it’s 30 days from when you factor the invoice, not from when the factor bills the broker. A 1-week delay in billing and that 2% for 30-day pay has shot up to 4.5% for “45 day pay”. For some people it works, but most don’t want to deal with it.
What Am I Paying For?
In order to pick the right freight factoring company for your business, it is important to know what you are paying for. Let’s first discuss where your interest goes. The factoring company has to pay interest on the money it is using to pay you. Waiting 30+ days to get paid, and managing a business from the road, just isn’t an option for some people. You are paying for money that your factoring company isn’t going to make back for more than a month, they need a bank to provide the funds. Second is the Account Receivable team. Hidden away is a whole team of people billing freight brokers and patiently waiting for money in return. And finally, the Operations teamthat is there for you to make sure you’re getting paid. They are the face of the factoring company, the ability for a factoring company to manage thousands of clients with only a fraction the number of people on staff. Operations is the customer service, paperwork auditing, money paying machine that makes a factoring company tick.
Factoring companies are fronting interest payments, payroll expenses, and other costs before receiving payment from the broker. The lower your rate the less likely your factoring team will answer your phone calls, respond to emails, and take the time to make sure the freight invoice submitted is correct. And with accounts receivable, less people means your payments will slip through the cracks, some invoices won’t get billed, and you will have to pick up the slack.
It’s a vicious cycle, rates determine operations staff > which limits the accounts receivable department > which delays payments from your customers > which increases interest. So, how can a factoring company break that cycle? They put the liability back on the carrier, and yes, that includes generic non-recourse factoring programs as well.
What Risks are Involved?
“If the broker doesn’t pay you, I’m covered right?” That is a very loaded question. Behind “What is your rate?” it is probably the second question you are going to ask. I know what you are thinking, non-recourse means you are protected when a broker goes bankrupt and nobody pays in more than 90 days, so you don’t need to worry about it. Right?
You are 100% correct when it comes to the broker going bankrupt, it’s the definition of non-recourse, but not necessarily correct when it comes to brokers taking 90 days to pay. 90-day chargebacks are the industry standard for generic non-recourse factoring companies to offload their debt onto the carrier.
Let’s go back to that vicious cycle, lower rates equal less operations and less accounts receivable employees, which results in billing errors and less people to follow up on those errors. If the broker doesn’t have the paperwork necessary to get paid themselves, there is no way they are going to pay you, so you get stuck with the debt. Are you thinking, “Wait! Stop! I am on non-recourse! That’s your problem.” Well, not necessarily. The generic, low rate, non-recourse factoring program only covers brokers that go bankrupt, and the broker is still in business, they just don’t have the invoice needed to process payment. That means you get to pay the factoring company back (they still make their money) and you must dig up three-month-old paperwork and re-bill the broker yourself.
You Get What You Pay For
Overall, the generic non-recourse factoring program is offered by just about every freight factoring company out there, and it works, for them. It’s your decision, and it works for a lot of people. It’s the same reason why you can buy a cheap new tractor that will spend more time in the shop than it does on the road. Or, you can buy a slightly more expensive tractor, that’s reliable and will put more money back into your company than it took out. You get what you pay for. Do you want a person to answer the phone when you call, or do you want to leave a message? Do you want to know you are going to get paid before the weekend or just hope the funds will come through? Do you want to take the fall when a broker doesn’t pay because the bottom corner of the BOL scan is cutoff, or do you want the factoring company to?
If you answered ‘YES’ to any of those questions, call us at (678) 507-3370. See why OTR Capital isn’t just another freight factoring company. We look for partners that want to create mutual growth, and understand why getting the right factoring company, not the lowest rate, will take your business further than you ever thought possible.