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Factoring can keep owner-operators’ cash flowing in uncertain times
One of the most difficult things about owning and operating a small trucking business is cash flow. Company drivers and owner-operators who are leased to carriers benefit from a regular settlement check. Whether the cash comes weekly, bi-weekly, monthly or on some other schedule, it arrives somewhat regularly.
Owner-operators who have their own customers don’t get that benefit. They often wait 30, 60, 90 days or more for payment to arrive from their customers. While they wait, the bills keep coming, the fuel tank needs filling and the other expenses of operating a trucking business continue unabated.
That’s where factoring can make a major difference.
“There has never been a more important time to take advantage of factoring,” said Jennifer Lickteig, president and CEO of TBS Factoring Services. “A factor provides cash flow on a regular basis.”
According to Lickteig, the economic turmoil caused by businesses around the world shutting down for the COVID-19 pandemic has had a severe impact on payment for services such as trucking.
“The pandemic is causing business failures, and those that stay in business, their credit lines might be suffering,” she explained. “Some are experiencing longer cycle times, meaning the owner-operator has to have more cash to continue operating until the customer or broker pays.”
Factoring services like TBS pay the owner-operator for loads hauled, taking on the responsibility of billing the customer and collecting. For these services, the factor keeps a small percentage of the load revenue.
“The primary service is to act as the owner-operator’s billing and collections representative,” Lickteig explained. “We’ll calculate and mail the invoice and follow up with any collections activity necessary.”
Lickteig is straightforward about the use of a factoring service.
“I’ll tell you first that the best scenario is to not need the factor,” she said. “If you do have sufficient funding to keep your business operating without a factor, that’s good.”
Keeping as much revenue as possible in the business is a best practice, but the amount of money lost by unpaid invoices can cause serious damage.
There are two main types of factoring, broken down by how much responsibility the owner-operator is willing to accept. “Recourse” factoring means that the factor can ask the owner-operator to pay back cash received if the factor can’t collect from the customer. In “nonrecourse” factoring, the factor pays the owner-operator and assumes all responsibility for collection. If the customer doesn’t pay, the factor loses out, not the trucker.
“When you use [TBS] services, we’re going to pay you, even if we don’t get paid, and we’re not going to come back and ask you to pay it back,” Lickteig said.
One thing to look for in a factor is whether the service allows “spot” factoring. Some factoring services require the owner-operator to turn over collection of every load hauled. TBS allows its clients to factor some while keeping others, according to Lickteig.
“If you have a customer that you know pays within, say, six days, why would you want to factor that?” she asked.
Ancillary services offered by factoring companies add more value to the service. Checking the credit of a potential customer or broker can be critical. Lickteig said TBS provides free credit checking to its clients, helping ensure they are doing business with customers that have a solid reputation for paying.
TBS also offers fuel cards with discounted fuel pricing and services such as tax information and even guidance applying for a COVID-19 stimulus payment. While those services are helpful, “the main reason for someone to use us is cash flow,” said Lickteig.
The difficult economic climate caused by COVID-19 leads some truck owners to take financial risks they otherwise wouldn’t, and that’s another area where a factor can help.
“A common practice we’re seeing is owner-operators using high-interest credit cards to pay for fuel and operating expenses,” Lickteig explained. “If you’re relying on credit cards right now, something is broken in the cash flow process.”
For many, it may make more sense to sacrifice a small percentage of load revenue to obtain cash, using that to operate rather than credit cards with much higher interest rates.
Lickteig cautioned against another operating pitfall, merchant cash advances (MCAs).
“It’s an alternative lending scheme that I consider a predatory financial platform,” she said.
MCAs are often advertised using terms like “get cash now” or “same day cash.” They’re a source of fast operating money — at a cost that can be crippling. Many require access to bank accounts and debit cards, so that lenders can make sure they are paid first. If the money isn’t there, fines and fees start adding up and interest rates are hiked. The situation can become hopeless in a short amount of time.
Lickteig suggests that owner-operators ask for assistance from their factors in such situations.
“If you need cash, call your factor and ask them to help you before you take on an MCA,” she said, adding, “We work with a partner that manages workout programs to get drivers out of those debts.”
Most factoring services can help when unexpected expenses arise, too.
For example, TBS “also provides a no-interest solution for business needs like engine repairs or an insurance renewal, if the client has a good record and can provide the documentation we need,” Lickteig explained. “We don’t charge any interest and we’ll spread the repayment out on a mutually agreed upon schedule.”
Some factoring services won’t go so far as to help out with a loan, but Lickteig said most factors know that things can happen.
“We understand that if the driver can’t drive, they can’t factor with us,” she said. “We’ll work with a lot of conditions that other factors would turn away from.”
In addition to encouraging owner-
operators to employ a factoring service when needed, Lickteig had one more message.
“I want to say thank you to the drivers for what you do,” she said. “Everything we enjoy about our daily lives is due to truck drivers.”
When it comes to keeping the business operating, factoring services can be an important ally.