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Overdrive - Cash Flow Crisis Part 2 - Sharing risk: Load factoring offers strategic value amid economic contraction
In normal economic times, factoring has long appealed to certain fleets, especially small ones that have trouble keeping a steady flow of collections. Overdrive polling shows that almost half of owner-operator and small-fleet readers with authority maintain a factoring arrangement – outsourcing collections by selling invoices to a third party to collect in exchange for a percentage of the invoice.
During the COVID-19 coronavirus-induced slowdown, factoring hasn’t been a widespread new solution for struggling fleets, since many of their problems stem from shippers cutting back or going out of business, or brokers’ rates themselves falling precipitously.
While factoring doesn’t present a quick fix for escaping heavy debt, it can be more valuable than usual as a risk management tool in the current environment, says TBS Factoring Service President Jennifer Lickteig. She points to nonrecourse factoring, which is the most common type used by independents and small fleets, in which the carrier always gets paid because the factoring company assumes all risk of nonpayment.
“We can do a 90-day contract right now on a fixed rate that ends in 90 days — to mitigate risk right now with a pre-emptive business move,” Lickteig says.
The cost for shifting that risk with nonrecourse factoring, plus the benefit of getting prompt payment, is often 3% to 5% of the invoice, though sometimes lower. In recourse factoring, which costs less, the factor does not cover invoices that remain unpaid after efforts to collect. As the chart below shows, a factoring arrangement of some kind is an increasingly common part of the business models of owner-operators with their authority, whether running a single truck or more.
Step deck owner-operator Bryan Hutchens of Oklahoma last year negotiated a rate just below 3% with TBS, though he hasn’t yet factored a load with them. He has long experience with his customers for direct freight and with brokers who generally are reliable on payment speed.
Still, he knows nonrecourse factoring can be a backstop if freight continues to be slow or if one of his customers goes belly-up. “You just don’t know how many people are going to stay in business,” Hutchens says.
Covington, Indiana-based owner-operator Rex Brooks saw his biggest shipper customer file to reorganize its debts under Chapter 11 bankruptcy in April — in hindsight, no surprise. Brooks had been hauling second-class mail – marketing materials such as catalogs – for LSC Communications and predecessor companies for 30 years.
“The last six months, they’d gotten kind of slow” on payments, going from weekly to monthly and quarterly, Brooks says. He’d “quit devoting all of my trucking to them” on account of that and developed other accounts.
By early May, LSC owed him about $15,000, with some of those invoices dating to December. “They owe several different people several millions of dollars,” he estimated. “The chances of me getting paid are probably pretty slim.”
Had Brooks set up his three-truck business in a nonrecourse arrangement with those loads, odds are the shipper’s credit would have remained decent enough to have received near-immediate payment on that $15K worth of hauling, minus the cut to the factoring company. Yet his familiarity with a dependable customer outweighed worries over nonpayment.
The biggest reason, though, Brooks avoided factoring is a practice in some arrangements that has been relatively common through the years. Even in nominally nonrecourse arrangements, contract clauses can dictate chargebacks to the after a certain length of time spent by the factor attempting unsuccessfully to collect payment — in effect, becoming a type of recourse arrangement. Brooks noted a 45-day period he’d seen in the past, though periods such as 90 days also have been common.
As Brooks put it, “if they don’t pay, you’ve got to pay the factoring company back” some percentage of the invoice.
There are, however, plenty of factoring companies today whose nonrecourse arrangements put 100% of the burden and risk of collection on the factoring company itself with no qualifications. Factors protect themselves by robust credit checking of brokers and shippers, in turn offering that information to carriers, too, to use in their own business decisions. Knowing such information is available to carriers also serves as an incentive to brokers and shippers to pay on time.
The credit-check service from a reputable factor gives its clients fair warning on a shaky customer, too. When TBS says it won’t factor invoices from a certain broker or shipper, Lickteig says, clients “pay close attention to that.” As Brooks learned, once a shipper or broker goes under, odds are “they’re not going to take care of their carriers and drivers,” Lickteig says.
Former expedited owner-operator Dawn Weaver manages a small fleet, Big Ass Freight, focused on oversize freight on extendable RGN trailers. She designed her three-truck all-owner-operator business to be as low-asset as possible. A factoring partner, OTR Capital, has been her collections go-to from the beginning.
“The biggest problem a small trucking company has is cash flow,” Weaver says. “I don’t have a problem filing suit in small claims court and chasing that” if a broker doesn’t pay, “but I didn’t want to invest the time and money in training a collections staff, which is what you have to have when you’re dealing with brokers.”
In her experience, only Landstar’s brokerage has better quick-pay rates than her nonrecourse agreement with OTR. “Every year, they’ve reduced my factoring percentage based on the volume I do” with them, she says.
Weaver relies heavily on OTR’s broker credit-check function as her insurance against getting involved with the fly-by-night freight brokers who have no intention to pay any carrier. “If a broker’s not approved” in OTR’s system for factoring, she says, “I email [OTR] and ask them why not, and they’ll tell me, which is nice.” She’s come across situations where a broker is actively attempting to get the company to do business with them — in such cases, it may make sense to take the load if their credit is approaching levels acceptable to the factor.
“If their credit rating is low and they’re not paying people,” though, Weaver added, she stays away.
The credit checking function of Apex Capital’s credit systems, says Chief Strategy Officer Brian Carlgren, specifies a dollar amount that “each potential customer is good for factoring. And any credit information changes” for a customer you’ve done business with, “our system notifies you. Clients see that as an add-on benefit that becomes a little critical” in uncertain times.
Apex Capital customer Joel Ruhlman, the non-driving co-owner and -operator of 30-truck/50-platform-trailer small fleet North American Specialized Transport (NAS) of Warren, Michigan, notes that broker credit checks particularly are valuable now that “brokers are struggling” just as much as everybody else. Apex provides with its credit check for carriers specific factoring limits for brokers a carrier is considering.
Ruhlman in May noted in his Apex portal a big change in a Chicago-based 3PL’s limit. “Their credit score there went from 97 to 54, with days to pay from 32 to the high 60s or low 70s,” he says. Such credit-checking services “help us make sure we’re working with reliable brokers.”
Weaver was hopeful when she spoke with Overdrive in early May that the slowly opening economies around the United States would translate to improved freight volumes and better rates. Speaking on a Monday morning, she pointed to a load she’d been negotiating with a broker that had been paying “$7,500 on Friday. This morning it was $7,000, and it’s down to $6,700 this afternoon,” she said.
At least, she added, should that load move, the factored invoice payment would be “direct-deposited without delay, assuring the funds are available to pay our owner-operators and vendors every Friday.”
Cold comfort in a down business climate, maybe, but some comfort, at least.