Factoring is a common way to manage cash flow. A factoring company buys your receivables for a percentage of the value of the invoice. You’re paid cash (typically within 24 hours) and then the factoring company assumes the responsibility—and the risk—for collecting. Not a bad way to get cash, considering that factoring adds no debt to your books.
The obvious benefit to factoring is that you get your money when you want it instead of when your customer decides to pay. The real payoff, though, comes when you can use the factor’s money to make more money. Factoring isn’t about selling your accounts receivable, it’s about managing them. Short-term cash is great, but factoring is easier to justify if you can use the money to add business or save admin expenses.
How to Make It Work
In trying to collect, some factoring companies will generate your billings, perform credit checks, provide management reports, and take on the work involved with collections. What that means is the factoring company is going to function as an extension of your operation and will come in direct contact with your customers. Their actions, methods, and performance will reflect on your business.
Evaluate factoring companies as you would any other supplier. What do they know about trucking? 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? Can they help manage fuel, insurance, or other monthly bills? For instance, DAT has a relationship with Advance Business Capital (ABC) because of its history in the trucking business and the leverage that comes from representing 700 carriers. On the DAT Load Boards, a green “check” icon next to the load post means the load can be factored through ABC.
There’s a cost to factoring, so don’t tolerate bad service. The better factoring companies will welcome the scrutiny.