Factor Fiction

Pennies have been scarce as rain lately, leaving cash-strapped trucking companies scurrying around looking for a fast buck. Trouble is, trucking isn’t a business where you can hold an impromptu tag sale. And the personal resources business owners traditionally rely on-savings, credit cards, home equity loans, help from family or friends-don’t go far, even in the short term.

There’s always the banks, which again are offering cheap money. One option is to put up your receivables as collateral for a loan.

But lenders always start their inquisitions with pesky questions about your personal finances. The strength of your business’s balance sheet is a second-tier issue (you’d think it’d be the other way around). The quality of your ARs come into play only after the banks are satisfied with the creditworthiness of you and your company. By then most small business owners-already saddled with personally secured debt-have already been shown the door.

A second option for quick cash is factoring. A factoring company buys your receivables for a percentage of the value of the invoice. You’re paid cash, and the factoring company assumes the responsibility-and the risk-for collecting the amount. The rate you pay-typically between one and four percent-is based on the factor’s perceived ability to collect (they’re looking for quality, too: don’t expect a factor to buy your stale accounts or put the touch on your shadiest customers).

Not a bad deal, considering that factoring adds no debt to your books and gives your business a cash infusion. No wonder it’s like a Turkish bazaar out there, with so many trucking companies hawking their ARs.

But the short-term euphoria of having cash in hand won’t mask the long-term effects of a misplayed approach to factoring. Factoring isn’t about selling your accounts receivable, it’s about managing them.

In trying to collect, some factoring companies will generate your billings, perform credit checks, provide management reports, and take on a lot of the administrative hassles of chasing down payments on the receivables they buy.

Think about that a minute. When you contract with a factoring company, “you’re inviting them into your corporate home-they’re an extension of your operation and will come in direct contact with your customers,” says Chris Bennett, with the Waterloo, Ont.-based financial services firm TFS Group. “If they collect badly, or slowly, it will reflect on your trucking business.”

Evaluate factoring companies as you would any other supplier. If the company is providing management reports, what do they look like? When will you see them? Do the deadlines match your accounting schedule? How are credit checks handled?

“Get an agreement in writing,” Bennett says. “If the factor promises to get billings out on time, and AR reports to you on time, and do credit checks every time, then great. If the factor falls down, be tough: tell them you’re not going to pay the factoring rate.” You are, after all, paying for their service. I don’t know what your margins are, but forking over three or four points to a factor is expensive enough. Don’t tolerate service that stinks.

The better factoring companies will welcome the scrutiny. And you’ll make a more informed choice of business partner if you can look beyond the pile of cash sitting on the table.