The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
This summer, Convoy announced the start of its freight factoring service, in partnership with Apex Capital. Aimed at attracting small carriers, quick turnaround funds are now available for non-Convoy loads in addition to the 0% QuickPay option previously available for Convoy loads.
With QuickPay being offered by a number of brokers, the benefits of choosing a factoring company over QuickPay don’t always stand out on the page. On one hand, factoring is faster than QuickPay, but it’s at a higher fee. Like most financial decisions in life, cost isn’t the only consideration for carriers when selecting between a broker’s QuickPay option and utilizing a freight factoring partner. Convoy’s entrance into finance is a signal that there is money to be made and opportunity for automation in the trucking fintech space.
When a carrier uses a factoring company, it has hired a financial service to provide same-day or next-day funds, at a fee, while the factor maintains its book and collects on invoices in its place, in 30 or so days. At its core, the carrier is selling the paperwork of completed loads to the factor. The factor is absorbing for the carrier the 30- to 45-day payment terms that are typical in the trucking industry. Load or payment issues might occasionally draw an invoice out to closer to 90 days, which without factoring, could leave the carrier hurting for funds for payroll, fuel, maintenance and repairs or insurance premiums.
Even when the carrier’s primary interest in factoring is alleviating their cash-flow challenges, the relationship provides further benefits for the carrier. The back-office services of factoring help support the accounting operations. The factor handles the invoicing and collections, following up with brokers, shippers and freight forwarders for status updates on payments. They let the carrier know where its attention is needed — for example, by relaying a debtor’s request for additional paperwork or a debtor’s notice of an upcoming short payment due to a dispute. There are certain situations with the debtor that require the carrier’s involvement to resolve, but the factor works up to that point and keeps the carrier updated on the important activity of its book. Many factoring companies have a client portal that provides carriers an easy interface to check the status of funds, view their reports and submit new paperwork.
The carrier also gains the advantage of the internal systems of the factoring company. The factor has payment trend data on every debtor their carriers have worked with and can quickly identify when slowing payments across all carrier accounts might be due to emerging financial troubles of the debtor. They can advise on the credit rating of a new debtor before the carrier takes a load. The greatest risk in a factoring business is bad debt, and great freight factoring companies are amazing at avoiding bad-debt shippers and staying on top of collections so loads factored rarely turn into uncollectible revenue. These are competencies that few businesses excel at, especially small fleets that operate on thin margins and rarely have large administrative teams to handle receivables effectively.
Throughout these services provided by the factor, the carrier has an account manager, one person who is learning their book, and many factoring companies liken themselves to a partner of the carrier. The carrier-factor relationship means that when the carrier does well, the factor does well. The company is looking out for its client and cautioning it through risks.
“Carriers still love having someone to talk to about their payments. Many are old-fashioned and we cater to those needs,” says Jared Flinn, owner of Smart Freight Funding in Omaha, Nebraska.
The factor will be careful to ensure the carrier is avoiding risky situations in its book. If this is more conservative than the carrier wishes to be, this could lead to frustrations, but it’s important to note the factor’s caution derives from experience in situations gone bad. If a previous carrier couldn’t afford to continue running its business after 90% of its book was tied up in a claim or if 90% of its book was left unpaid by a debtor in financial trouble, the factor will be less willing to let the next carrier’s book become 90% concentrated with a single debtor.
Venture backed startups like BasicBlock and Axle Payments have focused their efforts on enabling brokerage quick pay options and/or factoring for owner-operators and small fleets directly.
“We’re finding it easy to get carriers to switch their factoring to BasicBlock. A driver referred us to three of his friends last week telling them, ‘All you have to do is scan the docs and get paid. No following up, no taking a picture and figuring out who to email, just scan and get paid,’” says Taylor Monks, CEO and co-founder of BasicBlock.
As another tech-enabled new entrant to the trucking payment space, TriumphPay is figuring out how to fit into the carrier, shipper and broker value chain. “When a carrier enters a factoring agreement it can be for different reasons. Carriers sometimes need that factoring relationship to help manage their cash flow, as well as help manage their AR to ensure that they are being reimbursed for completed loads,” says Kate Juliao, compliance specialist at TriumphPay.
While freight factors are viewed by some as loan sharks or payday loan shops for truckers, they lend vital services and bandwidth to the owner-operators and small fleets that need the most back-office help. The factor’s ability to acquire drivers, assess risk and treat drivers well are keys to their success. As long as there are firms providing these simple solutions, drivers will happily give up a cut of their bounty in exchange for simplicity and peace of mind.
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