Small Motor Carrier Blog

Posts

Factoring Funding

What Every Freight Broker Should Know About Factoring

Invoice factoring has been around for thousands of years and can be traced to the 18th century B.C. Babylonian king, Hammurabi. Over the past 10 years, transportation intermediaries are directing more and more of their carrier payments to factoring companies ‐ anecdotally, we hear as much as 80%. At Triumph Business Capital, we’ve processed carrier payments for over 500 freight brokers, and our experience is consistent with those reports.

Why Now?

It starts with economics. Lots of new capital has flooded the commercial finance sector, and many new factoring companies have entered the transportation space. And, why not? The collectability of a freight bill is terrific. As a result of increasing competition, carriers are solicited daily with factoring offers of high advance rates (the percentage of the freight bill advanced at time the invoice is sold or “factored”) coupled with factoring fees that are a fraction of what they were 10 years ago. In fact, factoring fees are typically at or below the same pricing which many brokers charge for quick pay.

The quality of factoring services has improved as well. Many of the top factoring companies offer online credit services, fuel purchase programs, equipment and insurance financing and mobile technology applications. The factoring industry has come a long way, too.

Frequently Asked Questions

Q. What is the difference between recourse and non‐recourse factoring? And, how does it affect me?

A. Recourse means the factoring client is ultimately responsibility for the payment of the invoice. Non‐recourse factoring allows companies to sell their invoices in a style in which the factoring company assumes the credit risks. Often misunderstood, non‐payment for legitimate disputes (such as shortages, claims, late delivery, etc.) remain the responsibility of the client regardless of contract form. The style of a carrier’s factoring contract should have no impact on the freight broker.

 

Q. What is a Notice of Assignment and do Freight Brokers need to acknowledge them?

A. The Uniform Commercial Code (§ 9‐406) outlines the business and law underlying the invoice factoring industry. The ability to assign payment obligations (accounts) from the
broker (account debtor) to a factor (assignee) was a purposeful and intentional provision that the UCC drafters identified to provide businesses with opportunity to raise working
capital. Remember, the assignment of pay proceeds is separate and distinct from the assignment of services or other responsibilities in a legal contract (i.e., Broker‐Carrier
agreements). Payors cannot restrict the assignment of proceeds and are subject to double‐payment liability if they choose to ignore proper notification. Notice of
Assignments (NOA’s) can be presented by an invoice “stamp”, separate communication (letter) or both. Once you have been “effectively noticed” all payments must go to the
factoring company, whether the invoice has a stamp or not, and regardless of any claims by the carrier whether or not a particular invoice was factored. Never stop sending
payments to the factor until you receive a release letter, which the factoring company should be willing to provide

 

Q. What makes a Notice of Assignment binding? Is a signature required?

A. The effectiveness of an NOA is a question answered by case law, but the practical guidelines are simply and widely accepted. The account debtor is not required to
acknowledge the NOA with a signature and, even if there was a signature, it might not be clear as to whether the person signing the NOA had the proper authority to do so.
So, you don’t have to sign them – but that doesn’t really matter. Once an account debtor sends payment to the factoring company, it’s broadly understood that they did so based
upon receiving notice. (Why else would you send money to someone other than the carrier who hauled the freight?) If you pay a factoring company one time, then the NOA
is probably effective and you’re most likely bound by its terms. Now, you can refuse to use carriers that work with factoring companies, or even certain factoring companies,
but you can’t ignore a valid NOA once received.

 

Q. Am I obligated to pay a carrier’s factoring company if we haven’t received a Notice of Assignment.

A. Short answer is No. With more and more “online” or “cash advance” lenders entering the space, this question is more likely to come up than you may realize. A business may
grant a factor or lender a security interest in its accounts receivable, and perfect that security interest by filing a UCC financing statement. Security interests establish priority
among secured creditors, but do not impact payment remittance. It’s all about assignment and your receipt of effective notification of that assignment.

 

Q. Does the presence of a factoring company restrict our ability to offset future payments for claims?

A. Frankly, there’s a lot of “urban myth” surrounding this subject, but it ultimately depends on the broker‐carrier agreement. UCC § 9‐404 provides the factor (assignee) with certain
protections against claims and defenses – but only to the extent that the contract was silent on those provisions. Generally speaking, the broker’s obligation to the pay the
factor are identical to the contractual obligations for paying the carrier. As a practical (and ethical) matter, the factor is entitled to the same level of communication regarding
claims and setoffs that you would reasonably provide the carrier.

 

Q. What can be done about factoring companies which report slow payments and delinquencies to credit reporting agencies, regardless of how timely those payments are sent?

A. There are two primary reasons for unfair credit reporting: the U.S. Postal Service and bad factoring companies. Mail times are continuing to deteriorate, and payors using mail
service providers are likely experiencing additional delays. If you’re committed to mailing your payments, utilizing the “Intelligent Bar Code” will reduce USPS time and
processing errors. Alternatively, most reputable factoring companies will accept payment by ACH or wire, particularly if your TMS or accounting system can provide
reasonable instructions for correctly applying those payments.

 

Q. What about the “bad actors” in the factoring community, who are unreasonable, annoying and difficult to deal with?

A. The International Factoring Association (IFA) is an engaged trade organization which is elevating its constituency through education, best practices and advocacy. Over 450 IFA
members ascribe to a Code of Ethics and the organization actively responds to inquiries and disputes. You can contact the IFA at (800) 563‐1895 or info@factoring.org.


Let’s talk about how we help

Whether you’re a broker needing to make payments or a carrier looking to get paid, Triumph Business Capital can help you.

 

Invoice Funding

Making Sense Out of Carrier Payments

Freight brokers pay carriers – that’s what you do.  You do it for fuel advances and again when the load’s settled and billed. You pay when it’s due and sometimes you pay quick.  You pay by fuel card, by express check, by bank draft, by paper check.  And mostly you pay factoring companies – after they call to verify the load, again to check for advances and yet again to collect.  You’re ready to pay the trucks who’ve been with you forever, the one that showed last week and the one which may still call back.  You pay carriers – but is that what you do best?

New Technology, More Options

Large industrial firms have been outsourcing vendor payments for decades. It’s become a standard practice in medical, hospitality and government contracting.  The consistent premise is to operate your business within your business systems, and to have your systems feed payment instructions to payment processors – seamlessly, safely and cost effectively.  That’s the goal.

The evolution of technology integrations has also resulted in a proliferation of financial solutions.  Some of these solution structures make particular sense in certain industries, not so much in others.  Some providers offer credit capacity, others focus only on technology solutions.  Just to make things more confusing, the terminology isn’t consistent.  But overlooking the labels just a bit, we can identify three general categories of payment processing solutions.  For purposes of this road map, let’s call them Dynamic Discounting, Supply Chain Finance and Virtual Card Payments.  And, of course, there are combinations of the three, but let’s get started anyway – paying particular attention to what makes sense in for-hire transportation.

Dynamic Discounting

The simplest form of payment processing involves an arrangement between a buyer (such as a freight broker) and vendor (carrier) whereby payment for goods or services is made early in return for a reduced price or discount.  Dynamic Discounting has been primarily a technology service offer with the following characteristics:

  • Transaction unchanged between buyer and vendor
  • Servicer may or may not provide credit or liquidity
  • When credit is provided, it’s most typically in the form of a loan structure (to buyer)
  • Often combined with other tech-based services, such as freight bill auditing

We haven’t seen huge impact of Dynamic Discounting in the trucking space, largely because of the complexity.  Most truckers are happy with two payment terms: standard and quick.  The market saturation of factoring companies has probably simplified quick pay requirements as well.

Supply Chain Finance

Often called “Reverse Factoring”, the basic premise is that buyers (freight brokers) can become more attractive to their vendors (carriers) by incorporating working capital options from the onset. Unlike traditional factoring, where carriers sell their accounts receivable, reverse factoring is a financing solution initiated by the broker to help its carriers to finance their open accounts more easily and at a lower cost than what would normally or otherwise be available.  In Europe, where factoring is more prominent than in the U.S., Supply Chain Finance has become more prevalently adopted than traditional factoring.  Characteristics include:

  • Cost benefits to both buyer and vendor
  • Proactive alternative to “Factor Fatigue”
  • Optimal in markets where buyers deal with a large number of small vendors and can rely upon the payment processor to minimize onboarding costs

Our company’s payment processing platform, which we call TriumphPay, is a form of Reverse Factoring or Supply Chain Finance.  There are a few other very good products coming to the transportation intermediary market in this style as well.  From a broker’s perspective, the quality of the carrier experience, and consequently their rate of adoption, will largely drive the cost saving benefits to be realized.

Virtual Card Payments

Despite several transaction models, this is a style of B2B payment processing that uses a single-use credit card number. Virtual card payments have become extremely popular in certain industries and offer distinctive advantages to buyer, including fraud deterrence and revenue opportunities.  However, processing costs are transferred to vendors which has resulted in limited adoption in other industries.

  • Highly controlled, buyer-centric process
  • High adoption rates in stable and/or contractual vendor communities (i.e., hospitals/medical providers)
  • Low adoption rates in markets with high factoring penetration

To be fair, Virtual Cards are a valuable tool to have in your payment processing toolbox.  You’ll need to determine whether it’s a platform you lead with or use to supplement other transaction models.

Outlook

Payment processing options are coming.  If the U.S. trucking industry is similar to other markets around the world, it will be coming quickly. But please understand, these are customized solutions that can be tailored to fit your business like a glove.  The more time you invest in learning about the various structures, including their relative strengths and weaknesses, the better equipped you’ll be to make these financial products works for you.

 

 

Moving to the Next Level- Growing Your Trucking Company Part 1 by Timothy D. Brady

The most common question I’m asked by owners/managers of small motor carriers is:

“How do I grow my trucking company?”

Moving your business to the next level isn’t based on luck. Growing a trucking company requires dedication and leaps of faith, but most of all it requires a solid business plan. This plan looks at the company’s potential, projects its revenue needs (over the next 5 and 10 years), and then determines where growth plateaus will occur, thus being prepared with both cash and assets as each plateau is reached.

One of the biggest mistakes many companies make is trying to grow too fast. The first rule of growth is being prepared with the capital investment needed, yet at the same time ready for the drain of cash while new equipment starts producing enough revenue to support itself.  As any successful businessperson will tell you, growth initially drains assets both in cash and in personnel, so you must plan growth very carefully.

Try these pointers:

  1. Have a complete business plan. Know the numbers (expenses versus income). Be sure your growth has a real opportunity for success.
  2. Evaluate your market and know it will support your growth.
  3. Have a vision of how you’ll reach each plateau in your growth plan.
  4. Set revenue goals. Have the facts and figures of what you’re doing based on your plan at hand. If it’s working, stay the course; if it’s not working, adjust or scrap the portion which isn’t achieving its goals.
  5. Know your break-even point, the figure which changes every time any expense increases or decreases. It’s the point where losing money stops and profit begins.
  6. Be sure you’ve included in your break-even costs a salary for yourself, and anyone else working for your company. Any company owner waiting for profits to pay his salary is doomed to working for someone else. Your profits are where your funds for growth will accumulate and where performance bonuses come from; it’s not your salary.
  7. Determine a profit margin, which will retain your competitive position while growing your capitalization fund.

A trucking company owner who thinks he’s going to strike it rich in the first five years had better think twice. That’s not to say this isn’t possible, but you have a better chance of selecting next week’s winning lottery numbers. If you want to grow your company, reinvest your profits back into your trucking company.

In the next blog article, I’ll provide an example with numbers on how to establish the needed funds to sustain and grow your trucking company.

Drive long and prosper, and remember: Sustainability is the first step towards growth.

Timothy Brady ©2013

To contact Brady go to www.timothybrady.com

For more information on Trucking Business Courses go to: www.truckersu.com