6 Invoice Factoring Risks And How To Manage Them
Like any financial tool, factoring carries certain risks. Here are the invoice factoring risks truckers should watch out for—and ways to avoid them.
Trucking companies have a lot of immediate expenses. Every week, you have payroll and fuel costs. Together, these can equal up to half your revenue. Then, you have monthly payments for trucks and insurance, which can eat up another quarter of your income. Repairs pop up unexpectedly and must be paid immediately, with highly variable price tags. In short, you need dependable cash flow just to keep your fleet on the road.
That can be a challenge with brokers and shippers, who typically have between 30 and 60 days to pay. Invoice factoring fills this cash flow gap. When you factor an invoice with Bobtail, we put the money in your account the same day (for invoices submitted before 11 a.m.; after that, the cash arrives the next day). Later, we’ll collect payment from the company that hired you. You’ll pay a low factoring fee between 1.99% and 2.99%, depending on the size of your business—and that’s all.
Questions about no-contract factoring with Bobtail? Call us at 410-204-2084 to learn more.
Like any financial tool, however, things can go sideways with certain factoring deals. We’ll cover the major invoice factoring risks and how to manage them below. But before we get to our main topic, let’s address a more fundamental question: Is invoice factoring a good idea for your business?
Why use invoice factoring in the first place?
We’ve already described how factoring helps to ensure quick, reliable cash flow for trucking companies. But there’s another reason invoice factoring is a great way to keep bank accounts flush. Factored funds stay off your balance sheet, so the cash you receive from factoring won’t show up on any credit reports or loan documentation. Say it’s time to add a truck to the fleet. If you have a lot of outstanding loans, banks won’t provide the funding you need for the new rig.
But factoring is not a loan, so it won’t impact your credit limits. Factoring companies aren’t lending you money; they’re buying your invoices for the full amount (minus the factoring fee). That makes invoice factoring the best way to get funding for your trucking company, especially if you plan to take out loans to grow your business.
Of course, some companies make factoring tricky. While you don’t have to worry about these invoice factoring risks with Bobtail, you should be aware of them as you compare providers.
6 Invoice Factoring Risks To Watch Out For
Here are the six major factoring risks to consider—and all the ways we help you manage that risk at Bobtail.
1. Long, Restrictive Contracts
Many factoring companies lock truckers into contracts, sometimes for as long as three years at a time. While you’re under contract, you may not be able to factor with another provider, take payments directly from shippers, or even choose your clients without approval from the factoring company. These contracts limit your freedom to run your business, and the details may be buried in fine print and pages of legalese.
Bobtail removes the issue by doing away with contracts altogether. You’re free to come and go as you please, and there’s no hefty stack of legal paperwork to navigate. It’s simple.
2. Invoice Volume Requirements
Factoring contracts impose all sorts of restrictions. Some require you to factor most or even all your invoices, giving the factoring company full control over your revenue. Have a longstanding relationship with a shipper who always pays promptly? Too bad. With the wrong factoring partner, you may have to process that invoice through the factoring company—and pay the associated fees.
Bobtail is a no-contract factoring tool. It allows you to factor the invoices you want to factor and not the ones you don’t. If you’d rather take a few direct payments, that’s none of our business; it’s yours.
3. Hidden Fees
Traditional factoring companies may hit you with all sorts of hidden fees. Setup, credit checks, bank transfers: Factoring companies may nickel and dime you for all of them—and more. You end up paying more than the factoring fee you planned for, the one the sales reps advertised, and you built into your budget.
Bobtail doesn’t charge hidden fees. You pay the factor fee, a low percentage of invoice value, and that’s it. No surprises.
4. Holding A Portion Of Your Funds In Reserve
A reserve is a type of security deposit, a portion of the invoice value that the factoring company holds until they get paid by the broker. Reserves essentially take your money hostage for weeks at a time. They also make bookkeeping a nightmare; you can’t just report the full invoice value. You have to create a separate entry when your reserves are (eventually) released, and you have to do that with each and every factored invoice.
At Bobtail, we know that money is yours, and we like to keep accounting simple. That’s why we never hold reserves.
5. Restricting Your Clients Based On Credit Checks
When you sign a contract with a factoring company, you may be signing away control over your client list—especially if you go with non-recourse factoring, which includes insurance for some types of failed broker payments. These companies run credit checks on every shipper and broker you plan to invoice. If a broker doesn’t pass the test, the factoring company may not accept their invoices. That’s a problem when they have you legally obligated to run all your payments through them. It means you don’t get to work with that broker—even if it’s someone you know is dependable.
That’s not a risk with Bobtail. No contract means no restrictions on who you work with. In rare cases, we may decline to factor an individual invoice for a shipper with very poor credit, but that doesn’t mean you can’t bill them directly.
6. Funding Interruptions With Freight Claims
Transportation is a risky business. It’s regrettable, but freight gets damaged. When that happens—and it happens—shippers will charge you for the loss by filing a freight claim (also called a broker claim or shipper claim, and sometimes just a claim). That’s already a less-than-optimal scenario. But some factoring companies make it worse by immediately halting all funding until the claim is resolved. If you’re locked into an exclusive contract with the company, that could put your business income on hold indefinitely.
Bobtail’s friendly, responsive customer service team works with truckers to resolve claims as quickly as possible, and we offer payment plans if a claim gets charged—plans that allow you to keep funds flowing without interruption.
Bonus Tips For Managing Factoring Risks
When comparing factoring companies, fleet owners and owner-operators should keep a few things in mind. First, be prepared to read any factoring contracts you’re considering in detail—including the fine print. Sales representatives may not have all the answers, and they might neglect to bring up certain fees or even something major, like invoice volume requirements.
Next, don’t be afraid to ask lots of questions. If a broker or shipper goes out of business before paying an invoice, how will the factoring company get paid? Often, they’ll pass that charge on to you. (When we have to issue a chargeback at Bobtail, we put carriers on a payment plan and pursue repayment from brokerage bonds and shippers, reimbursing our clients when we recover the balance.) What do their reserve policies look like? Is there a termination fee for taking your business elsewhere? These are all situations that factoring sales reps may not mention upfront. To avoid surprises, ask.
Of course, the simplest solution for managing invoice factoring risks is to choose Bobtail. Our no-contract mobile app is easy to use, and we sidestep all the hazards listed above with our simplified approach to factoring. Just open the app, enter load details, upload a rate confirmation and a bill of lading, and get your funding—all without leaving your rig. You’re free to leave anytime, with no termination fees or surprise charges, so there’s no risk to getting started. Try Bobtail for free with a one-month trial, and get ready for a simpler—and less risky—way to factor.