Fleets Turn to Payment Services as Cash Tightens, But Financial Executives Warn of Possible Pitfalls

This story appears in the March 9 print edition of Transport Topics.

As cash flow becomes tighter for many fleets, more are turning to financial services that pay invoices almost instantly. Trucking and financial executives said that while the service known as “factoring” can be beneficial, once a fleet gets started, it can be hard to stop. As a result, they recommend carriers understand the full scope of services offered and costs involved.

“As with any business, if they’re not profitable, factoring is not a good solution” because of the potential to incorrectly gauge a company’s financial health, said Greg Porter, a partner with Capital Funding Solutions, Fort Lauderdale, Fla.

Trucking companies often bill on terms of 30, 45 or even 60 days. For struggling carriers that turn to factoring, payments that used to take two months suddenly arrive in two days or less — but at the cost of a fee.

“For a small company, not only do you have to have capital funding for the fuel, but with every load we take on a 15- or 30-day billing cycle. In order to run without the aid of factoring, we would need substantial capital resources behind us,” said Joseph Whitney, chief executive officer of truckload carrier Corporeal Transportation, Birmingham, Ala.

Dan Robbins, president of factoring firm TranCentral Inc., Burnsville, Minn., said his firm has been receiving more in-quiries from larger carriers because fewer banks are lending.

Robbins acknowledged that “factoring can be expensive, but provides a lot of service.” For example, he said fleets can receive credit information on potential customers and brokers 24 hours a day. In addition, a factoring company can adjust credit lines daily, he said, providing carriers with the ability to expand or contract quickly.

But factoring comes with costs and conditions. Finance experts said these companies typically pay 90% of an invoice’s value up front, taking a fee of 2% to 5%, and release the rest of the invoice’s value when it is paid.

Factoring companies typically maintain a “reserve fund” consisting of the carrier’s money, which is used for invoices not paid. In some cases, factoring companies take more money from the fund if an invoice ages beyond certain points, then replenishes it if and when the invoice is finally paid.

Invoices not paid within a certain time frame — usually between 90 and 120 days — are charged back to the carrier.

In addition, factoring companies will sometimes charge different fees depending on the credit-worthiness of the carrier’s customer, said Janice Rubin, vice president of Fortified Financial Services. A customer with a history of paying slowly, or not at all, also might bring higher fees or at least different terms.

However, Dan Baker, the president of Apex Capital Corp., said  that the rates his company charges have come down nearly 50% over its 13 years. At the same time, they are offering more services, including a fuel card that provides discounts at many truck stops.

Still, he said, factoring is not for everyone.

“If [a fleet] doesn’t have the margins to sustain their business . . . all factoring is doing is postponing the inevitable — a business failure. That is not the type of business that we like. We want longer-term relationships,” Baker said.

DiAne Reed, senior vice president of national sales for Marquette Transportation Finance, said even as the credit market has tightened, factoring companies are able to provide cash and financial expertise for small and midsize fleets.

“We are a strong, reliable lender that understands the business complexities and can be a partner with good trucking companies that just don’t have the resources available,” she said.

Porter, of Capital Funding, warned this quick cash flow can create the illusion that a company is doing better than it really is.

“Fundamentally, a lot of businesses don’t have any idea whether they’re profitable or not,” Porter said. “They don’t work with any type of a budget and don’t know what they have to make to be profitable.”

The issue caught the attention of MacroTransport, the Daytona Beach, Fla.-based freight broker that is the parent company of Fortified Financial Services. It launched FFS after observing several carriers struggling with cash flow.

“Typically, as fleets grow larger and larger, they have enough cash flow to maintain operations and they don’t have to factor to improve their cash-flow situations,” Rubin said. “But smaller fleets — the mom and pops, the owner-operators who might have three or four trucks leased — their cash flow kills them.”

While Porter advocates factoring as a good solution for companies that are generally sound but have problems with aging re-ceivables, he warns that the wrong kind of deal can present problems.

“They have to really understand what they truly have to pay when all is said and done,” Porter said. “There are a lot of companies out there with . . . hidden fees. Most carriers don’t really reconcile their books and understand what they’re truly paying.”

Such hidden costs, Porter said, can include transaction fees, per-invoice fees, per-diem fees and interest fees of 5% or more — not to mention reserve funds and disbursement charges that can run as high as $50.

In an interview with Transport Topics shortly before departing as executive director of American Trucking Associations’ National Accounting & Finance Council, David Hershey said carriers can have a hard time breaking free of the factoring cycle.

“It tends to be a self-fulfilling prophecy for some,” Hershey said. “Unless their business volumes rise, they can’t get themselves out of it sometimes, and it can become a protracted period of time that they’re doing it.”

Jack Milligan, founder of financial consulting firm Higher Roads, said he discusses alternative strategies with truckers.

“I would just ask them in a brutally candid context to examine their financial situation, and ask them if they really need assistance like that,” Milligan said. “Can you get by with the bare minimum? There are a lot of things you can do to tighten your belt, slowing down and just be-ing more responsible on the personal side.”

For some truckers, factoring can work, Milligan said, provid-ed it is a short-term strategy and the company has some cash in reserve. Too often, though, Milligan said companies sign up for factoring because they are desperate.

David Jencks, a partner in Jencks and Jencks, a law firm with a specialty in transportation-related finance, disagreed. He said he believes the hidden costs of aged receivables outweigh the costs of factoring.

For that reason, Jencks said, he sees a large number of transportation companies currently getting into factoring and almost none getting out.

“There are very few businesses that don’t benefit from improved cash flow, so there is no business where I’d say factoring doesn’t make sense for you,” said Jencks, whose firm is based in Omaha, Neb. “Factors assume collection responsibility, and they oftentimes assume the billing responsibility, so it’s less overhead for the carrier.”

Dudley Boyd, president of National Bankers Trust, Memphis, Tenn., said trucking companies should access more traditional lines of credit — using receivables as collateral or partial collateral — rather than engaging in full-fledged factoring.

He recommends this as a way to avoid long-term commitments and early-termination fees that essentially keep them stuck in the factoring cycle in perpetuity.

“It’s unethical — it’s almost criminal,” Boyd said. “What they’re doing is preying on the weakest among us. A guy’s desperate and he’s panicking. They stick the paperwork in front of him and they say you can have the money tomorrow. Instead of competing on price and service, they lure them and come up with a story, and once they get them into the contract they can never get out.”

Myrah Duque, who operates Deltona, Fla.-based Duque Transportation with her husband, Osvaldo, said she understands factoring comes with a cost.

“I am very concerned about the fees,” Duque said, “but I also understand that it’s a business and they have to make money.”

Duque’s company uses factoring for its own hauls, in addition to various other truckers for whom it has handled dispatch work. Because of their size, she said she doesn’t foresee the day when Duque accumulates enough cash to be able to move on from factoring.

“We did many years without factoring, and we were going nuts because we had to wait 30 days in order to get paid, or we would have to get QuickPay [software] and the broker would charge like 5%,” she said.

Whitney of Corporeal, whose company began operations during 2008, said he does envision the day when he will no longer use factoring, but only when the company is large enough that the factoring fees are less than the system saves him.

“If we get up to 100 or 150 trucks, and you look at the idea of the average truck doing $4,000 a week, you’re looking at $400,000 a week,” Whitney said. “Two percent of that is $8,000. That’s a lot of money. I can justify that to employ in-house personnel to track billings.”

But today, when factoring fees are a fraction of that, Whitney considers it a good buy to let the factoring company worry about collecting the bills. He also cites additional value that comes from the association.

“They not only deal with us, but they deal with hundreds of trucking companies around the country too,” Whitney said. “So, they know who’s paying and who’s not paying. They can point to a particular customer and say, ‘They’re not paying the bills as quickly as they used to.’ ”

News Editor Neil Abt contributed to this story.