5 Star Freight Factoring http://5starfreightfactoring.com 1-888-785-4491 Tue, 21 Mar 2017 03:05:02 +0000 en-US hourly 1 How to Avoid Getting Burned in Your Factoring Contract http://5starfreightfactoring.com/avoid-getting-burned-factoring/ Sun, 12 Feb 2017 05:07:55 +0000 http://5starfreightfactoring.com/?p=24664 The freight hauling industry is a cash-intensive business and factoring has evolved into a complex web of providers, some of whom are honest and well-meaning professionals that will work hard to assist you in obtaining the cash flow necessary for ongoing operations. You can also find less reputable providers that will say and do most anything to get you […]

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Don't get burned factoringThe freight hauling industry is a cash-intensive business and factoring has evolved into a complex web of providers, some of whom are honest and well-meaning professionals that will work hard to assist you in obtaining the cash flow necessary for ongoing operations. You can also find less reputable providers that will say and do most anything to get you to sign a contract that they would prefer you not read prior to signing.

This guide is designed to help you ask informed questions of your factor BEFORE you sign the contract. At a minimum this guide can help you avoid the frustration and headaches that come with things not being as you thought they were. This guide can potentially save you not only frustration and headaches but also thousands of dollars that can surely be put to better use elsewhere in your company.

This information guide is provided to share an opinion and should not be interpreted as legal advice in any form. Every contract is unique and we encourage you to talk with an attorney before you sign any contract, including ours!

We see a lot of factoring agreements pass our desk from virtually every competitor out there and the number of “wrong for you” deals is surprising. A wrong for you deal is one that costs you thousands of dollars more than it should, and we see them all the time.  We strive to educate anyone that calls us on the process and what to look for in any agreement, ours or anyone else’s.  We put this guide together based on our experience of mistakes that w e see over and over, we often ask questions about how these terms are put together in an existing agreement and too often the answer is “I don’t know”.

If you are considering signing a contract, extending a contract or factoring for the first time we strongly recommend that you ask these questions as a starter.  These are not the only questions you should ask but these are some of the details that may turn out to be significant down the road.  It will be just as important to understand the answers you get when you ask the questions, if you don’t understand something, ask again.  We would love to answer these questions for you about our agreements as well.  We strive for transparency in all of our dealings and encourage you to compare our deal with any other proposals you have.

Term & Renewal

What is the length of time you will be bound by the contract and how will it renew?

Three to six month terms are best but one year contracts are not uncommon.  Scrutinize terms longer than six months and use longer term contracts as negotiating points on other terms. Ensure you understand the renewal provisions once the term of the contract expires; many contracts have auto-renew provisions that require you to provide advance notice of your intent to not renew.  Failing to get in front of an auto-renew provision can lock you into an additional term.

Reserves

How much is held in repost and when can you recover it?

Most factoring companies will hold back a ‘reserve’ that is the funds remaining  after an invoice and the factoring fees have been paid. Some of these funds will be held in deposit to guard against bad debt; these funds are often not released to you until the account is closed. Look at the amount of money that can be held in deposit, this is your money that you will not have access to until the account is closed.  Remaining reserves above those held in deposit will be returned on a periodic basis with two to four weeks being typical. This is your money that is being held back so a shorter reserve holding period is better.

Getting Funding vs. Receiving Cash

When the timing of cash flow is important you need to know the difference

Funding an invoice is the process of presenting an invoice to your factoringcompany. Many factoring companies will claim same day funding or 24 hour funding but that does not necessarily mean you will have cash within 24 hours.  It is not uncommon for funds to take 48 hours or more to actually appear in your bank account. The processing of submitted invoices should occur within the same day up to a cutoff window, anything submitted after this cutoff will process the following day. You should therefore look for a cutoff window that is as late in the day as possible, ideally a minimum of 2:00PM EST.

ACH deposits will typically take 24 hours to clear and your factor may charge fees  from $0 to $20 for an ACH deposit. Wire transfers will clear within an hour or two and you should expect fees from $20 to $50 for a wire transfer.  Understand your options and recognize that these could change over time, you may not typically need the speed of a wire transfer but it is good to know what it will cost before you need it.

Online Account Access

A commodity you should demand for free

Not long ago online access was a unique benefit, today it should be a pass/fail criteria. Factoring companies that can’t provide online 24 hour access to your account may be lacking critical infrastructure to properly support your business.  Most reputable factors are providing this benefit for free but if you run into someone that is not you need to ask why. Online account access is table-stakes, don’t settle for less.  Keep asking questions.

Contract Minimums

Paying to not use available credit

Some contracts have minimum volume requirements to maintain an active account status, effectively requiring you to submit a minimum amount of invoices within a set period. Failure to meet these volume requirements may incur a fee.  Similarly, minimum account fees may be charged regardless of the volume that you factor. Minimum factoring volume and minimum account fees may or may not be linked in your contract; that is you could incur minimum account maintenance fees AND fees for not meeting minimum volume requirements.

Hidden Fees

The devil is in the details

A contract can contain fees for almost anything you could think of and while many of these may be small ancillary fees that can certainly add up over time.  Beware of getting ‘nickled and dimed’ from these fees by looking for them and understanding when they apply and what you can do to avoid them.  Common fees include invoice processing fees, ACH or wire transfer fees, credit check fees, minimum factor fees and numerous others. These fees can be lucrative for factoring companies and costly to you so read your contract carefully and don’t hesitate to question anything that you don’t fully understand.

Advance

Understanding the obvious

Most factoring companies will tell you that they advance a certain % and charge a certain % but it may not be clear if the charge is included in the advance % or not.  An example is a company that advertises a 90% advance and charges 3% but on first funding a trucking company may find that the fee is taken out of the advance and so the net proceeds are actually 87%.  Don’t assume that a 90% advance implies that you will receive 90%, seems obvious but it may not be.

Up-Front Fees & Exit Fees

They get you coming and going

Account setup fees are common to offset the expense of initial credit checks, UCC searches, due diligence fees and filing fees. These fees can range from $200 to over $1,000 per account but can often be deducted from first funding to reduce out of pocket expenses. These fees should not be incurred unless you are guaranteed funding.

You may see an application fee which is typically non-refundable and should be avoided; this is pure profit for the factor and should be avoided.  Many contracts may provide for exit fees to close UCC fillings and manage open invoices. These fees can again range from $200 to over $1,000 but may be waived for customers in good standing at the time the contract terminates.

Contract Termination

Getting out…

You should enter into a contract with a clear understanding of how you can exit that same contract. How much notice do you need to provide before you can close the account or the account renews?  Knowing how hard it will be to exit and how difficult your factor may make it for you to exit can be tough to figure out. Look for specifics in your contract and also be very wary of any verbal promises along the lines of ‘that is something in all our contracts, we never enforce that’.

Recourse vs. Non-Recourse

Not always what it seems

There are few things more misunderstood in factoring than recourse. Too many people falsely believe that a non-recourse contract eliminates the possibility of them being liable for an invoice that does not pay on time.  True non-recourse contracts are typically expensive and contain restrictions on who you can factor and strict conditions under which non-recourse applies.

Typically, a non-recourse contract will have the factoring company assume responsibility for payment when the invoice payor is insolvent and goes out of business which is not likely. A slow pay or no-pay shipper will typically get recoursed back to the carrier.  If you believe that you need a non-recourse contract study it carefully and seek legal counsel to ensure that you understand the specific terms and conditions when recourse applies and when it does not. Do not ever go by the word of the salesman, go by the letter of the contract.

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What Do Factoring Companies Charge? http://5starfreightfactoring.com/factoring-companies-charge/ Fri, 16 May 2014 13:55:30 +0000 http://5starfreightfactoring.com/?p=1340 Factoring Rates Most factoring companies charge a rate based on a % basis, that is they charge a fee that is a % of the amount that is factored.  These % fees will depend on the amount of money factored.  Generally speaking, the greater the amount of money factored then the lower the fee.  In […]

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Factoring Rates

Most factoring companies charge a rate based on a % basis, that is they charge a fee that is a % of the amount that is factored.  These % fees will depend on the amount of money factored.  Generally speaking, the greater the amount of money factored then the lower the fee.  In the trucking industry it is not uncommon for a single truck owner operator to see rates up to 5%.  Small fleet operators that operate 10 or more trucks can can to see rates 2% or less.  Many factoring companies will use the number of trucks a trucking company is operating as they can estimate well how much revenue a single truck should generate in any given month.  The base rate is one of the most important aspects of what a factoring company will charge but there are other fees that can be significant that you should look for and be aware of.

Hidden Fees

While the factoring rate is the largest and most obvious component of what a factoring company will charge there are a number of other fees that should not be overlooked.  A reserve account is similar to an escrow account which is used to hold back funds by the factoring company.  They do this to provide some protection for bad debt.  Reserve accounts can be a % of each invoice, a flat $ amount per invoice or a flat $ amount per account.  Reserve accounts, like escrow accounts, release money back at some point, make sure you understand what triggers money to be released, most often it will be passage of time or payment by shippers to the factoring company.

Invoice fees are another common fee charged by factoring companies.  This is typically a small fee of $1.00 – $10.00 per invoice submitted for payment and can be described as a processing fee.  Each invoice submitted does require work for the factoring company and while these are not uncommon fees not all factoring companies charge these fees.

Payment fees are also common.  Once an factoring company gets paid they need to get money to you and they can typically do this a number of ways from cutting you a paper check, ACH direct deposit to your bank, wire transfer to your bank, deposit to a fuel card or T-Chek or Comcheck.  Each factoring company may charge a different amount for each of these different types of payment so ask questions and make sure you understand before you are surprised.

Other Factors Influencing Your Rate

A carriers credit score can influence the rate that they can expect to receive.  Most often their credit score may be more of a gating factor as to whether a factoring company will work with a carrier.  Recourse vs. non-recourse.  Factoring companies that offer non-recourse programs generally do so with higher fees than standard recourse programs.  This area too you should be careful with as many non-recourse programs do not offer the protection that may carriers are led to believe they do.  Most often, carriers are led to believe that if a shipper doesn’t pay they are protected in a non-recourse agreement.   In practice, they are typically protected if the shipper becomes insolvent or files bankruptcy, something quite a bit different than simply non-payment or slow-payment for most any other reason.

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The Real Cost Of Trucking http://5starfreightfactoring.com/real-cost-trucking/ Mon, 26 Aug 2013 04:46:28 +0000 http://5starfreightfactoring.com/?p=951 The real cost of trucking is broken down in the following infographic from the Truckers Report. Fuel costs lead the charge against your profit averaging 39% of total operating costs.  All-in costs yield a $1.38 per mile operating expense, about $180,000 per year per truck.  With driver salaries accounting for 26% of total operating costs […]

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The real cost of trucking is broken down in the following infographic from the Truckers Report.

Fuel costs lead the charge against your profit averaging 39% of total operating costs.  All-in costs yield a $1.38 per mile operating expense, about $180,000 per year per truck.  With driver salaries accounting for 26% of total operating costs the two combined form a 1-2 punch on your wallet.

Cost of Trucking Per Mile

Trucking Infographics by TruckersReport

 

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More Interstate Tolls Coming http://5starfreightfactoring.com/more-interstate-tolls-coming/ Mon, 25 Feb 2013 13:38:08 +0000 http://5starfreightfactoring.com/?p=772 The post More Interstate Tolls Coming appeared first on 5 Star Freight Factoring.

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More Interstate Tolls Ahead

I71 and I-75 merge together briefly at Cincinnati  Ohio and then pull back apart 20 miles later in Northern Kentucky.  The Brent Spence Bridge collects these two interstates in Cincinnati and then funnels them together across the Ohio River.   This confluence in Cincinnati represents not only the gateway to the south but also a choke-point on the Interstate Highway System for trucking carrying more than $417B,  more than 3% of the US GDP, across this bridge each year.

The Brent Spence Bridge was originally designed to carry 85,000 vehicles per day and as a major corridor for freight traffic it is expected to need to support over 200,000 vehicles per day by the end of 2013.  The Kentucky Transportation Cabinet has ruled the bridge functionally obsolete.  The emergency break-down lanes were ripped out years ago to handle more traffic and with demands growing daily there is much debate going on about what to do and how to pay for it.  The what to do part is made difficult by the terrain, coming into Kentucky from Ohio the highway cuts a gouge through the side of a hill and climbs steeply through what was once the deadliest section of interstate in the country, referred to locally as Death Hill.English: Brent Spence Bridge on I-75 over the ...

Many of the issues of Death Hill were corrected but the terrain and existing development on both sides of the river leave precious few options for how to configure a new or modified bridge.  Most of the  design options have several miles of  approach from both the north or the south being impacted, this is going to be a big project if it gets done at all.

Engineers and politicians are pouring over the options trying to find a viable solution and with cost estimates coming in around $2.5B everyone is looking at where the funding will come from.  Spanning two states on a Federal Highway system also creates questions about who should be paying what at the federal, state and even county level.  The only thing for certain at this point is that no one is stepping forward with a clcear plan of how to get this work paid for.

Tolls

Given the price tag and the stiff arm from the federal government the discussion has recently centered on the likely scenario that this work will somehow involve tolling.  While local residents are organizing opposition to tolls proposals the stark reality is that tolling will likely be involved in this and most other meg-projects on the country’s decaying highway infrastructure.  A recent  Tax Foundation study identified that the share of road spending  covered by fuel taxes, tolls and other fees amounted to at best a 59% coverage in Delaware and a low of 5% in Alaska.  The study further concluded that tolls and usage based fees will continue to increase as the costs of maintaining and developing new highway infrastructure continues to rise.

The Interstate Highway System comprises about 47,000 miles of roadway including 2,900 miles of toll roads.  The initial build cost of the entire system has been estimated at more than $400B which puts some perspective on the estimated $2,7B cost of the Brent Spence bridge project.  Federal legislation actually banned tolling on the Interstate Highway system though some of the early projects were grandfathered into the system.  Many of these roads, such as the Massachusetts Turnpike, are part of the system but are generally not allowed to receive federal funds for maintenance and improvement.

3P Partnerships

The SAFETEA-LU legislation passed in 2005 encourages the use of innovative financing in recognition of the inability for federal highway funds to support the costs of ongoing maintenance and development.  That’s Washington speak for tolls.  The Public-Private Partnerships, commonly referred to as 3P partnerships, are contracted partnerships between governments and private parties.  This economic development model is gaining increasing popularity across the globe and in the US Highway System as well.  The Ohio Department of Transportation, ODOT, and the Kentucky Transportation Cabinet, KYTC, are both engaged in a Value For Money study that is designed to look at options for funding and delivering this project.

3P ventures are generally a successful means of financing large projects that federal, state and local governments often languish over.  They can also bring people and resources to a project in a timely manner that bring innovative ideas and shared risk.  The inclusion of private money also brings with the need to see how that money is returned and for highway projects that almost always involves usage fees such as tolls.

It is too early to know if the new Brent Spence Bridge will be paid for with tolls but the opposition against them needs to come to the table with more than just demands against a federal government saddled in debt.  As more projects get completed in this manner expect more tolls on our interstate highways.  Carriers of freight bear a significant portion of tolls, especially in the critical I-71/I-75 corridor and a certain amount of traffic can be expected to be diverted based on those tolls.  Ultimately, the cost of these tolls will get reflected in the freight that is transported though the immediate is often felt first, and the sharpest, by the one paying the toll.

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Factoring Credit Checks – Understanding Who And Why http://5starfreightfactoring.com/factoring-credit-checks/ Sat, 12 Jan 2013 03:58:05 +0000 http://5starfreightfactoring.com/?p=672 In the process of qualifying a new client for a new freight factoring account, we will pull credit on both our clients’ customers, also called the debtors; as well as the credit history of all principal owners of the clients’ business.  Most clients understand why we are pulling the credit of the debtors, because after […]

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credit-check

In the process of qualifying a new client for a new freight factoring account, we will pull credit on both our clients’ customers, also called the debtors; as well as the credit history of all principal owners of the clients’ business.  Most clients understand why we are pulling the credit of the debtors, because after all, they are the ones responsible for paying the debt.  However, occasionally I get asked, Why do you have to pull my personal credit when my customers are the ones responsible for paying the invoice?

The answer is pretty simple.  We pull personal credit to see how you manage the money in your personal life.  Often times this can be an indicator as to how a person manages their business and consequently how they treat their customers and inevitably how they will treat their factoring company.  Fortunately we do not put a ton of weight into a client’s personal credit score.  We understand the issues involved with having a challenged credit score and we certainly understand the freight factoring industry.  Therefore, we feel that a well managed portfolio can overcome any obstacles that might arise based on a client’s sloppy business management styles.

Another reason we pull personal credit is to look for liens or judgments that may hinder our ability to collect on a particular factoring client’s invoices.  If, for instance, a client has a large federal tax lien, the IRS can, and will, step into the picture and demand all payments from existing factored invoices be sent to them, with no consideration as to how much money the factoring company advanced for those invoices.  The Federal tax liens will trump any and all rights to collect the invoice payments.

A debtor’s credit in the scheme of things is probably the most important.  If a debtor consistently pays between 30 and 45 days, they would be considered a good debtor; the main word being “CONSISTENTLY”.   When invoices are paid in 32 days and then 65 days and then 45 days and back to 70 days, it could indicate a cash flow problem with the debtor and it is probably worthwhile to do a little more research to determine why they are paying in such an inconsistent manner.  Often times it could just be from a claim on an invoice that took time to resolve or sloppy or missing paperwork with the bill itself. But, only a little research will help determine the real issues.

At the end of the day, the debtor is the one paying the invoice, so their ability to pay off a factored freight bill is obviously important.  However, a client that has poor records or poor billing practices can cause more issues with the collection of a factored invoice than the debtor’s ability to pay.  Poorly managed loads can have claims and poorly organized invoices will inevitably cause delay and frustration to the client, their factor and the debtor.  All parties will suffer.

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Trucking Over The Fiscal Cliff http://5starfreightfactoring.com/trucking-fiscal-cliff/ Thu, 13 Dec 2012 16:11:50 +0000 http://5starfreightfactoring.com/?p=632 It is hard to walk down the street without having to endure some news about the impending doom known as the Fiscal Cliff. The purpose of this post is not to rehash in excruciating detail what the Fiscal Cliff is but to offer a perspective on how it impacts the trucking and logistics industries. The […]

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Trucking Over the Fiscal CliffIt is hard to walk down the street without having to endure some news about the impending doom known as the Fiscal Cliff. The purpose of this post is not to rehash in excruciating detail what the Fiscal Cliff is but to offer a perspective on how it impacts the trucking and logistics industries.

The Fiscal Cliff In Brief

The heart of the fiscal cliff issue is the expiration of Bush-era tax cuts that were no extended in the Budget Control Act of 2011 and signed by President Obama.  The purpose of that act was to stem the tide on the spiraling debt crisis and to ensure that the US Federal Government did not go into default.  The budget act increased the debt ceiling but also offered budget cuts in excess of the increase in the debt ceiling.  The act also called for a vote on a balanced budget amendment for the federal government, something that every state except Vermont currently has.

fiscal cliff and truckingThe Congressional Budget Office has estimated that full implementation of the  act would likely result in a reduction in the federal deficit from around 9% of GDP to around 2% by 2015.  Republicans in Congress are still fighting some of the provisions of the act, most significantly the expiration of tax cuts that were implemented in the Bush administration.  Effectively, the expiration of the Bush-era cuts will cause an immediate surge in tax rates including an increase in the capital gains tax rate from 15% to 20%, a new Medicare tax of 3.8% and overall higher tax brackets for individuals.

 

Trucking Impacts

One of the more serious implications of the act is the potential impact on taxation for trucking companies.  Many of the nations trucking companies operate as LLC’s where tax liability passes through to the owner at their individual rate.  The implication is that the tax rate of these companies will jump and that will need to be accounted for somewhere in these companies budgets.  Watching an additional 8% or more vanish from your bottom line is at the heart of many concerns over the fiscal cliff.

Such a dramatic rise in taxes has a lot of people; trucking companies and others alike, concerned about how this tax would be absorbed and whether the resulting set of actions companies are likely to take to offset this would create other, unintended consequences.  This is where the economists come into play and the picture gets very fuzzy.  No one can say with certainty what the impact would be at the macro level.  Certainly many businesses have weighed in on what they intend to do but there is not a consensus.

Some warn of devastating dire consequences that could trigger another recession while others view it as a speed-bump that we will pass over and the resulting reduction in deficits will have a booster effect on the economy overall.  The stagnation that is Washington will likely have a dampening effect regardless of what happens at this point.  There are reports that fleet orders are being held back to see how this plays out and even if a compromise were reached in Washington that minimized the concerns for trucking firms we have already slowed the economic machine and it will take some time to heat up again.  Most economists are predicting a slow Q1-Q2 period even in the best case scenarios and potentially a longer cycle of depressed activity if no action is taken and the act implements on Jan 1, 2013.  As the clock continues to move this scenario becomes all the more likely.

Waiting And Watching

What is your company planning on and what actions have you taken or intend to take as a result of the fiscal cliff?  Are you playing a “wait and see” game or are you actively preparing for a particular scenario?  Please share your thoughts on how you are preparing for the fiscal cliff.

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California Transport Refrigeration Unit (TRU) Regulation Compliance http://5starfreightfactoring.com/california-transport-refrigeration-unit-regulation-compliance/ Mon, 26 Nov 2012 02:34:32 +0000 http://5starfreightfactoring.com/?p=596 California, the bastion of state governmental interference regulation,  will see compliance to the Transport Refrigeration Unit (TRU) updated to include all model year 2005 and older units as of 12/31/2012.  The  regulation has been in existence since 2004 but the end of year year sees newer models fall under the regulation. For a better understanding of this […]

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California, the bastion of state governmental interference regulation,  will see compliance to the Transport Refrigeration Unit (TRU) updated to include all model year 2005 and older units as of 12/31/2012.  The  regulation has been in existence since 2004 but the end of year year sees newer models fall under the regulation.

For a better understanding of this regulation read the complete story at the California EPA website.

The basic gist is that the reefer units on all vehicles that pass through California must demonstrate adherence to the regulation.  Compliance will require registering your TRU with the California Air Resources Board who will award you with an IDN that must be affixed to both sides of the TRU housing.

Both Carrier Transicold and ThermoKing have compliance assistance documents available to help find the information necessary to complete the required forms.

More regulation is not what anyone wants but keeping updated and on the right side of them always matters.  If you run reefer and you pass through California then make sure you know whether your rig is in compliance and what you need to do to either get it compliant or prove that it is.  Read the EPA article linked to above to get the complete story.

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Driver Shortage Fuels Dedicated Fleets http://5starfreightfactoring.com/driver-shortage-fuels-dedicated-fleets/ Tue, 20 Nov 2012 02:30:10 +0000 http://5starfreightfactoring.com/?p=585 The Fort Wayne Journal Gazette published an article recently about how the impact of driver shortages has led large shippers, particularly in retail and perishable food to look closer at having dedicated fleet services.  Stores Favor Dedicated Fleets points out that constraints on supply chains have pushed large shippers towards dedicated fleet services to ensure […]

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dedicated fleet servicesThe Fort Wayne Journal Gazette published an article recently about how the impact of driver shortages has led large shippers, particularly in retail and perishable food to look closer at having dedicated fleet services.  Stores Favor Dedicated Fleets points out that constraints on supply chains have pushed large shippers towards dedicated fleet services to ensure capacity.

With the economy struggling to heal itself and shortages of drivers still prevalent many retailers and grocery chains are moving to lock up guaranteed capacity via dedicated fleet services.  Shippers benefit not only from guaranteed capacity but also through better cash flow management as the transportation expense is typically understood in advance.  This also follows the trend of outsourcing what is not core to a business and for many retailers, though not all, logistics and transportation is not a competitive advantage.  Being able to leverage the core expertise of a dedicated fleet allows the customer to focus on it’s core business and removes some of the risk of managing their own fleet.

The result of all of this is an increase of driver hiring, which is overall good news for the industry.  As housing markets warm up and economic conditions improve, albeit at a painfully slow pace, the demand for more drivers is increasing.  J.B Hunt reports that they grew their dedicated truck fleet by 4.8% in Q3 2012.  That growth was slower than prior year growth but is still an overall positive marker for the industry.

Perhaps the most important aspect is the ever-tightening time lead times that customers are demanding to move loads.  As supply chain management improves the efficiency of many operations the transportation component will become a larger constraint and focus area for shippers.  Large shippers will demand shorter lead times which ultimately requires more capacity and/or more dedicated fleets to address the need for improved timeliness.

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Factoring and Bank Lending http://5starfreightfactoring.com/factoring-bank-lending/ Sat, 17 Nov 2012 02:59:34 +0000 http://5starfreightfactoring.com/?p=566 I signed a client this month that was using his local community bank to cash flow his business.  They had done a great job over the past few years but after his business doubled in sales the bank was unable to extend the credit he needed to grow even more.  This has become much more […]

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Bank BuildingI signed a client this month that was using his local community bank to cash flow his business.  They had done a great job over the past few years but after his business doubled in sales the bank was unable to extend the credit he needed to grow even more.  This has become much more prevalent in the trucking industry over the last few years due to the downturn in the economy and the tightening of the credit belt.  After reviewing our freight factoring programs, our new client learned that he can grow his business to any size he wants and he was happy to give us a try.

Traditional banking is a great way to generate an operating line of credit.  These credit lines come in many different forms; the forms I run into the most are:

Personal loans

Personal loans require personal property or collateral to be pledged to guarantee the ability to repay the debt. Often times a personal loan is acquired by pledging real estate owned by the individual guaranteeing the loan, such as a home. The amount you can borrow is limited to the value of the collateral. All banks have different ways of underwriting risk, so you could expect to be able to borrow between 50% and 80% of the value of the collateral pledged.

Business Operating Line of Credit

A business Operating Line Of Credit is probably the most popular form of bank lending for businesses and it is very similar to the personal loan above in that several forms of collateral are needed to secure the line of credit. And like the personal loan, the amount of the credit line is limited to the amount used as collateral.

Accounts Receivable Line of Credit (ARLOC)

An Accounts Receivable Line Of Credit (ARLOC) is the most similar product to factoring that a traditional bank has to offer. With the ARLOC, the client submits lists of invoices (also called a schedule) that were sent to their customers and the bank will allow the client to borrow up to 80% of the invoice amount on the schedule. With these accounts, the customer will pay the client by sending money directly to a lock box at the bank so the bank can keep control of the incoming cash.

In fact, many bankers will argue that their loans are set up as a combination of all of the above; a personal loan, a line of credit and AR line of credit could all be used to generate a credit limit that you can utilize to run your business. And they would be right in that argument.

However, the main difference between a factoring company and traditional bankers is this:

  1. TIME needed to close the deal, sign paperwork and get the line of credit in place
    • BANK: This can take weeks, if not months. The bank will need to review years of financial information on the company as well as get appraisals on all of the equipment or real estate used as collateral. Plus, you will pay for the appraisals.
    • FACTOR: We can underwrite and have an account ready for funding in 24 hours
  2. CREDIT LIMITS
    • BANK: Credit limits will be limited to existing valuations of the company. If the company grows, it doesn’t necessarily mean that the credit limit will grow.
    • FACTOR: The credit limit is only limited the amount of sales you can generate. If the company doubles in size, so does the credit limit.
  3. EASE OF USE
    • BANK: the bank will require that you submit quarterly financial statements and your credit lines can be adjusted down if you are not performing as needed.
    • FACTOR: We do not review financials and your program is not subjected to a quarterly microscope
  4. ADVANCE RATES
    • BANK: Banks are traditionally limited to lending 80% of the invoice amounts
    • FACTOR: We will advance up to 95% of an invoice amount
  5. EXTRA SERVICES
    • BANK: None
    • FACTOR: Billing and collection services, credit monitoring services, accounting services, accounts payable services.

At the end of the day, you have to decide what works best for your situation. For most companies that are growing at a rate of 25% a year and more, traditional banking just doesn’t work.  The credit limitations combined with the stress and workload needed to keep the bank informed quarterly can be too overwhelming.

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Factoring Questions and Answers http://5starfreightfactoring.com/factoring-questions-answers/ Thu, 01 Nov 2012 14:01:28 +0000 http://5starfreightfactoring.com/?p=429 We take freight factoring sales calls every day and receive a huge array of freight factoring questions.  Here are some quick answers to our most popular questions:     Q: What are your factoring fees? A: Rates will vary based on volume you want to factor.  As a general answer our clients will range in […]

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questions and answers

We take freight factoring sales calls every day and receive a huge array of freight factoring questions.  Here are some quick answers to our most popular questions:

 

 

Q: What are your factoring fees?

A: Rates will vary based on volume you want to factor.  As a general answer our clients will range in factoring fees from 1.25% up to 4%.  We are the most competitive in the industry.  If we want a deal we will price it right.

 

Q: How much do you advance on a factored invoice?

A: Depending on the program and the volume factored, it varies between 93% and 95%

 

Q: Do you require a contract term?

A: Yes, depending on the program you decide to take, or contract range from 6 months to 2 years.  Obviously the better the rate, the longer the contract will be.  But, our average contract term is 6 months.

 

Q: Are there any minimum fees associated with the contract.

A: No, we do not require that you pay a minimum factoring fee each month and we do not hide it in the form of an administrative fee.  We do require that you factor at least $1,000 per month to keep the account active because we have to be able to determine if you closed the business or decided to stop factoring.  But, again, there are no fees applied to the account for lack of volume factored.

 

Q: Are there any hidden fees?

A: No, our contract is easy to find all the fees associated with your factoring account.  The fee structure will be reviewed with you prior to factoring.  The only fees you will see are: factoring fee, invoice process fee (if you choose to factor with copies of the BOL) and WIRE fee (if you need same day funding).  These are the only fees associated with our factoring contract.  Of course, there will be default fees added to any account that is habitually not in compliance with the factoring guidelines of our contract.  Like all factoring companies, we need to protect ourselves from fraud and the only way to deter it is to penalize for it.

 

Q: Do we have to factor all of our invoices?

A: No, you may factor any client you want to factor as long as they are credit worthy. But, remember, the more you factor, the less you factor fee will be.

 

Q: Do we charge for credit checking customers to factor?

A: No, we do not charge for credit checking of debtors. You may credit check as often as you need. There is no limit and you may do it on-line

 

Q: Do we have ON-LINE Access to our account?

A: Yes, you will be given on-line access to you account where you can review and download account activity as well as check debtor’s credit.

 

Q: How long does it take to get set up an account?

A: Most accounts can be set up and funded in less than 24 hours.

 

Q: How do we set up an account?

A: To set up a freight factoring account you need to send us an application. You must have an active MC number with proper insurance. We will need to see copies of your driver’s license and a W9.  That’s it.

 

Q: My credit isn’t very good. Do you have credit criteria I have to meet?

A: We do not put a lot of emphasis on credit scores. We are able to set up factoring accounts for clients with credit scores in the 500’s.

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