Letters: Factor vs. Bank, Highway Reauthorization
These Letters to the Editor appear in the July 13 print edition of Transport Topics. Click here to subscribe today.
Factor vs. Bank
This is a rebuttal to an Opinion you published by Dudley Boyd in your June 22 issue (p. 7; click here for previous piece).
The bank says, “No,” but the factor says, “Let’s do it.” Which is the better source for increasing your bottom line and your overall business?
Even during normal financial times, banks usually turn down 95% of all loan requests. During today’s difficult times, banks are just not making loans — especially to new clients.
So, what should you do: Give up, or go the route that can keep your business prospering and even growing?
Typically, a bank after weeks of investigating will loan only on secured assets. Accounts receivable are cut in half and then reduced further, and the credit line offered is usually limited to a small portion of a company’s net worth.
Different banks have different programs, and different factors also work differently. There are factoring companies that have very user-friendly services, and some of their contracts are open-ended contracts that can be terminated at any time with no termination fees.
There are many very successful trucking companies that may enjoy the use of a factoring service for many years, even if they don’t have a need for the improved cash flow. Many factoring programs contain no minimum, monthly or annual fees. A small transportation company can sign up a large national client and be able to handle it because the factor pays the invoice immediately. The company then can pay its drivers and take care of other expenses without waiting for the invoice to be paid in 30 days or more.
While it’s true that a bank may charge a lower rate than a factor, the service cannot be compared. Factoring services include credit investigation and collection of open invoices, which covers mailing statements and making the phone calls necessary to get paid — and just generally acting as a client’s credit office.
Of course, the factor also funds the client for the billing as soon as the service is performed. If a factoring company were to turn down 95% of what is submitted, it too could charge rock-bottom fees on only cream-of-the-crop accounts.
While your certified public accountant or attorney is charging large fees for his or her service, he or she may suggest that you not pay a factoring fee. But a practical business person knows that during hard times as well as good times, it is best to take the easiest path open to success.
Chief Executive Officer
In “Factoring: What You Don’t Know Can Hurt You,” Dudley Boyd provided a very comprehensive analysis of the options available to trucking companies during the credit crunch and, indeed, any time a company needs extra capital to grow or remain stable.
He is correct in saying many factoring companies charge excessive fees — some of them even charging you every time they call someone to find out when an invoice will be paid.
Boyd is also correct that many factoring companies make it very difficult to get out of the contract.
We were pleased Boyd made an effort to avoid lumping all factoring companies in the same group by suggesting that it is possible to shop around for the best deal.
The negatives that were mentioned in the article included minimum volumes; 12-, 24- or 36-month agreements; and fees, interest, overnight delivery costs and bank wire costs.
At our firm there are no required monthly minimums for factoring and no long-term obligations. We recognize that factoring should be a bridge to more traditional financing and that, typically, factoring services are a season in the life of most businesses.
We do not charge a termination fee, an application fee, a processing fee, an annual audit fee or a wire transfer fee.
Clients do not have to factor all of their accounts receivables. We encourage them to be selective about what and when they factor.
Factoring can be a great service to the company that needs funds instead of waiting 50.8 days (the average debtor days per client) to be paid. Indeed, it is one of the financial tools available to business owners working their way to success and stability.
American Prudential Capital
The editorial headlined “Reauthorization’s Rocky Road” (6-29, p. 6; click here for editorial) referred to “The White House’s unexpected move to seek an 18-month delay in congressional consideration of the primary bill to renew funding” for highways.
The 18 months that President Obama wants to wait before passing a new highway reauthorization act could be used as the transition period to phase in a new method used to collect a road tax based on miles driven. Here’s how it would work:
A bar code is installed on a vehicle reflecting its miles-per-gallon Environmental Protection Agency rating. After safety issues are addressed, a scanner on the pump handle reads the bar code and the pump then calculates the tax.
If Congress enacts a 1-cent-per-mile road-use tax for cars — it would be higher for trucks, depending on weight and type of fuel — and if the vehicle has a rating of 20 miles per gallon and 10 gallons were pumped, the miles to be driven would be 200 and the motorists would pay $2, added to their fuel bill.
After this method is implemented, the present federal gas tax of 18.4 cents per gallon would be repealed.
For electric cars, the road-use tax would be paid up front: $100 will “buy” 10,000 miles. A cut-off switch on the dash would alert the motorist the miles were about to run out, upon which the motorist would “buy” more miles.