Factoring has been called the world’s second oldest profession. According to Wikipedia, it is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks associated with the receivables.

Factoring is a method used by a firm to obtain cash when the available Cash Balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts. The use of Factoring to obtain the cash allows the firm to maintain a smaller ongoing Cash Balance. By reducing the size of its Cash Balances, more money is made available for investment in the firm’s growth or survival.

A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank." Accordingly, Factoring occurs when the rate of return on the proceeds invested in production exceed the costs associated with Factoring the Receivables. Therefore, the trade-off between the return the firm earns on investment in production and the cost of utilizing a Factor is crucial in determining both the extent Factoring is used and the quantity of cash the firm holds on hand.

During these trying times, trucking firms have been challenged to maintain cash flow, the lifeline of any business. Shippers have been taking advantage of the reduced freight volumes as leverage to not only reduce rates but extend payment terms from 30 to 60 or even 90 days. For this reason, Factoring can become an attractive vehicle for some trucking companies.

To gain some further insight on the status of Factoring as it pertain to trucking firms in the current economic environment, I contacted Tina Capobianco who is Vice President of J D Factors, a Toronto-based factoring company. I began our discussion by suggesting that there is a perception by some that factoring receivables is mostly for trucking companies in distress. I asked Tina if the majority of her company’s clients are in some sort of financial difficulty and how she would describe the different categories of companies that require the services of JD Factors. She responded as follows.

“Unfortunately, many people still look down on factoring as a financing vehicle for companies who are in distress. Nothing could be further from the truth. Although factoring has become increasingly popular in the transport industry over the past 15 or 20 years, many industries such as the rag trade have thrived on factoring for many, many years. While it is certainly true that factoring can be a last resort for companies that are in distress, we have many success stories as well. The reason that many companies that are in distress turn to factors is because it is much easier for them to qualify with us than a bank. This is due to the fact that factoring credit is based on the credit of the company paying the freight bill, not the trucking company that hauled it. As long as we can make acceptable arrangements with their bank and other secured creditors, we can often help them. Factoring also appeals to many companies that are in a high growth mode. Factors can react quickly to increased demands so long as their customer has good credit. Banks will take months to approve an increase in financing for any client.

This led to a question about how the economy has affected her business.

“This past year has proven a challenging one. The economic downturn has translated into a much higher demand for our products. However the lower debtor quality, higher risks of customer bankruptcy and decreases in debtor credit has made it very difficult to provide the financing required. Many companies that would have been approved 1 year ago no longer qualify because our criteria are much more stringent.”

What are the business decisions that lead a trucking company to factor their receivables?

“Improving cash flow has always been a priority for most of our transport clients and the main reason for a trucking company to factor their receivables. This past year businesses have seen that even their better customers are now paying much slower. So the demand on cash flow is even greater. Trucking companies still must pay fuel, payroll and other expenses on a daily or weekly basis while waiting 30 or 60 days for payments from their customers. Factoring is the means for getting the cash flow back into a company and protecting a company from bad debt.”

I asked Tina if she could share some insights on when a company should or should not factor their receivables.

“If a company is being paid COD or they qualify for a line of credit with the bank, that will provide them with the cash flow that they need. That company should have no need for factoring. However, a company may have a need for factoring if they find turning their receivables into immediate cash allows them to be able to pay their bills, offer credit terms to their customers or even be protected from bad debt. Another reason to factor would be if a company is facing a period of growth in their business, and they have good solid receivables. A bank will not be able to adjust its funding base to a company very quickly. Factoring on the other hand can provide the capital a company needs so long as it has good receivables to sell.”

What is the “Value Proposition” of J D Factors and why should a trucking company come to her company rather than perform the collection of receivables in-house.

“Factoring provides a company with the cash flow necessary for them to be able to pay their bills on time or even early. A factor will also conduct thorough credit checks on all the main customers and follow up until invoices are paid. This is a valuable service that prevents collection problems and bad debt for trucking companies. Just as importantly, the owner can focus on more important business issues like sales and profitability, instead of collecting accounts receivable.

J D Factors also has an exclusive relationship with Load Surfer, the new Canadian load board. This is a very important relationship on many levels. First of all, it is a value-add for clients that are factoring with us. When they use Load Surfer, any load that we are willing to purchase on a non-recourse basis is denoted with a green money bag symbol (we call it the J D Guarantee). This saves them the step of having to call our office every time they are considering hauling a load that they want us to buy. The J D Guarantee symbol can also be used by non-factoring clients as a business tool that they can use when deciding whether or not to take a load off of Load Surfer (if we are not interested in buying the bill, it is probably wise to think twice before hauling for that party).”

This prompted me to ask Tina about the training her people receive and about how they measure their performance.

“All of our employees go through intensive hands on training. We have a number of seasoned employees that are great role models for new employees. We have goals and objectives for each employee that they strive to meet each month.”

Since the economic downturn has placed considerable pressure on most trucking firms, are there some telltale signs that you watch for before agreeing to take on the factoring work for a prospective client?

“It is important that a trucking company has a steady consistent flow of business that keeps their trucks working. Once a company has difficulty finding loads to take or relies only on loads boards to move their trucks, that is usually the first sign of the end.”

Clearly Factoring is not for every trucking company. However, for companies that meet Tina’s stated criteria and for whom the rate of return on the proceeds invested in production exceed the costs associated with factoring the Receivables, this may be an avenue to pursue to maintain financial viability.