Bottom Line
Breaking up is hard to do

By Donna Ryun
OOIDA communications director

 

If you’re a small-business trucking professional who knows the trucking industry, then it follows that you also know about hard times.

Cash flow shortages can happen to any business, but truck owners can be particularly susceptible when freight slows down and the cost of fuel, maintenance and repairs goes up.

Survival has been the name of the game for truck owners during this recession. Remaining solvent while you’re saddled with both fixed and unexpected expenses and little revenue coming in is a daunting task. Credit may be difficult to obtain, particularly when you need the money now.

It’s no wonder that truck owners are looking for ways to keep the cash flowing wherever they can find it, and factoring is one such possibility.

For those who may not know, factoring is basically an agreement between your company and a factoring company that provides you with cash advances in exchange for your company’s invoices or accounts receivable.

The factoring company will charge a factoring fee, which is usually around 2 to 5 percent and upward, depending on the specific company. Some factoring companies will also add a service charge and/or interest based on how long it takes the customer to pay the invoice. Make sure you know the fee structure before you sign the agreement.

If the factoring agreement contains “non-recourse” terminology, it means that the factoring company will bear the loss if the customer does not pay the invoice amount. Your customers, most likely, will require approval by the factoring company. If it is a “recourse” agreement, then the trucking company will have to reimburse the factoring company for unpaid invoice amounts.

You should be sure to understand exactly what these terms mean before you sign the agreement. “Non-recourse” could mean only those situations in which the customer has failed to pay anything at all and only if the factoring company has approved them. If the customer pays only a portion of the full amount owed, the factoring company could still look to the trucking company to pay the difference.

A clear understanding of the factoring agreement is essential, so use caution and know what you are agreeing to before you sign. OOIDA’s Business Services Department can review factoring agreements for you, so don’t hesitate to call them for assistance.

There are indeed some benefits to factoring, such as receiving quick money when you need it and not having to qualify for a loan or to deal with all the paperwork that is involved. Depending on the terms stated in a factoring agreement, you may also benefit from not having to worry about collecting from your customers because the factoring company will handle that.

However, choosing to use factoring to improve your cash flow also has drawbacks.

First, you must realize that no amount of factoring can help if the business isn’t profitable or if you have no clear plan to make it profitable. If you’re not willing or able to cut expenses and find ways to increase revenue, then there’s really nothing to be gained from factoring. You are simply prolonging the inevitable. You might as well lock the doors and hang up the keys right now.

If you decide that factoring is the way to go in order to increase cash flow for your business, don’t forget to look ahead and consider what you may have to face whenever you decide to end your relationship with the factoring company. Will the factoring company be as quick to release your receivable accounts as it was to assume control of them?

Some reports have indicated that “breaking up is hard to do” when you decide to terminate your factoring agreement. For example, some factoring agreements include minimum volume terms that could cost you thousands of dollars in fees that weren’t really considered an issue until you decided to part ways with the factoring company.

If your company was invoicing for $15,000 a month when you entered the factoring agreement and later dropped to half that volume, the factoring company is sure to have kept track of the fees it lost because of the downturn. Now that you’ve decided to terminate, the reduction in fees becomes a real problem that could translate into substantial costs for you. Be clear about minimum volume requirements prior to signing the agreement.

You could face other problems when terminating a factoring agreement. Although they’re not common practice among reputable factoring companies, you should still be aware of them.

Some factoring companies require at least a year’s commitment, and they may also have agreements that include automatic renewal provisions unless you give them a specified amount of notice. These agreements may also include early termination penalties.

It’s very important that you know of these provisions before you sign the contract. Some unscrupulous factoring companies have charged extremely unreasonable termination penalties and have also required lengthy notice of termination. This could cost you big.

For example, consider this scenario: When you decided to factor with your current factoring company, they filed a public document informing all interested parties that it has rights to your invoices as collateral for the advances it makes to you as per the factoring agreement. This is normal procedure. The document is called a UCC Financing Statement or UCC-1, and is filed in the public location(s) dictated by the laws of the individual state(s) where you do business. UCC (Universal Commercial Code) refers to the collection of laws dealing with commercial business.

Let’s say that your current factoring company can no longer meet your needs – or the rates are too high. You want to terminate and switch to a new factoring company. However, as long as this UCC-1 filing is in place, it’s difficult, and sometimes impossible, for another factoring company to take over your factoring needs.

If the original factoring agreement requires a lengthy notice of termination – sometimes as much as 120 days or more – the UCC-1 filing won’t be released until that time has passed. Such delays can be quite costly and even devastating for you.

While it’s true that factoring could sometimes mean the difference between bankruptcy and survival, it’s important to be cautious before entering into an agreement – just as you would if you were considering the terms of any contract. Explore all sources of financing for your business in case there’s a cheaper alternative that would work better. Look for ways to improve your cash flow by cutting unnecessary expenses and increasing your revenue. Plan ahead and put back money for unforeseen expenses.

If you decide to factor, check out the factoring company’s credentials to make sure it is a reputable business. Ask for references from current and former clients. Clarify their services as well as their fees and termination procedures. Learn about their method of collecting payment from your customers. Are they courteous and professional? Will they keep you informed with regular reports? Will they negotiate on the rates or fees they charge?

Perhaps most importantly, don’t sign a long-term agreement with a factoring company even if it means that you won’t get the lowest rate for their services. Committing to a 12-, 24- or even 36-month agreement will certainly make it difficult if you find you’re not satisfied with their services and you decide you want to break up with them. LL


If you have questions about doing business as an owner-operator and/or an independent trucker, please e-mail them to donna_ryun@ooida.com or send them to P.). Box 1000, Grain Valley, MO 64029. We can't publish all of your questions in Land Line, but you will receive a response, even if your letter is not published.