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How Do You Spell Relief? Factoring Getting your receivables collected, that’s one way

by Peter Carter

One day you’re looking at about $50,000 in receivables, and the next day they’re gone.” It’s a huge relief. That’s how Lester Morell of Morell’s Trucking out of Moncton, describes factoring.

Factoring: a.k.a., getting somebody else to handle your receivables for a fee, has kept Morell’s business alive. Lots of outfits have gone belly up because of outstanding receivables. Nobody likes picking up the phone to collect money, particularly in a business like trucking, where everybody knows everybody else and you don’t know whether you’ll be asking a customer for a special favor by this time tomorrow. Nobody goes into trucking to be a bill collector.

Outstanding receivables, for a small company, can lead to personal conflicts, too. It’s easy to imagine a spouse-knowing the property taxes are due-asking her husband: “Have you asked your friend Don when he’s going to pay us that $20,000 he owes us? Well, have you?”

And in many small businesses, the accounts-receivables department is the receptionist or whoever’s sitting closest to the phone at month end.

That’s the way it was with Morell’s company. While it didn’t lead to his relationship breaking up or business going under, Morell knows the pressures of unpaid receivables all too well.

For almost two decades, he was an owner-operator. Then six years ago, he and his partner Lynn McIntosh got an operating authority, some contracts for runs to Toronto, and set up a home-office. McIntosh did the books. “The banks weren’t there for us, and the first few years were a struggle,” he says. “Youre billing and waiting 60 and 90 days and they’re not paying an in a lot of cases you know that the customers are going through the same thing you’re going through.”

“When you find out that there’s a way to get that outstanding money, it’s an unbelievable relief.”

A factoring company buys your receivables for a percentage of the value of the invoices. You get the cash; the factoring company gets the risk. You don’t have to do it with every receivable, and if you’re like Morell, you can eventually wean yourself off the factorer.

While factoring can be more expensive than more traditional forms of financing you will probably be paying between three and five percent of the invoice to the factoring company the rates are not tied to bank interest rates. So as interest rates creep upward, more small fleets with seasonal paying schedules and limited wiggle room will be considering the option.

Time was, factoring had a bad name. There was something desperate about hiring somebody to take over your debts. But that’s changing. Especially if you consider that using factoring is just like farming out the A-R end of your business.

Not only that, but if you actually do collect your bills in a timely fashion, your ability to grow will be improved considerably.

David Tubbs is the managing partner with First Vancouver Finance, and he specializes in providing factoring services to the trucking industry. He says the simplest way to understand how factoring works is to think of major credit-card companies as factoring outfits.

When you accept a credit card payment, you get the money immediately and then the credit card company goes after the customer for payment.

And it goes beyond bill collecting. A factoring company like FVF, says Tubbs, is your complete back office. He’ll do credit checks on new customers and then if a customer doesn’t pay the factoring agent, it will affect his credit rating.

Says Tubbs: A bank can provide a company with a line of credit but it’s more of a fair-weather lender. You have to establish a history of profitability.

The bank is going to look to the trucking company profit as a first source of repayment.

The bank then looks to the equity or net worth of a business as a second source and third, it’s a liquidation of the owner’s assets particularly the owner’s real estate.

If you don’t get paid in a timely fashion, it limits your ability to grow.