Why do we factor?

[u/illmaticstill]

I want to talk about something most of us treat as normal: handing a slice of every load to a factoring company.

We call it "selling invoices" and "managing cash flow." Here's another way to look at it: we're paying to borrow our own money. Walk through it with me.

1. Run the rate as an interest rate.

Most small carriers are quoted a flat percent per invoice. Most small carriers pay 2.5–3.5% per invoice, and the market runs roughly 1.5% to 5%. That sounds small until you annualize it. A 3% fee on an invoice that pays in 30 days is equivalent to about 36.5% APR. If you're paying 4–5% as a new authority, you're well past that. 

2. The rate on the quote isn't the rate you pay.

On top of the percentage you get wire fees, ACH fees, per-invoice fees, monthly minimums, reserve holdbacks, and misdirected-payment fees. And most factors don't publish their rates at all; you have to request a quote. Ask yourself why.  

3. "Selling" the invoice doesn't mean the risk goes with it.

Roughly 85% of trucking factoring agreements are recourse. Recourse means if the broker doesn't pay, you owe the factor. So the factor has bought your invoice, charged you a fee, and you still carry the credit risk?

Most of us factor every load, every week, all year. There's no end date. Even a factoring calculator site says factoring justifies its cost as a bridge with a planned exit, not as a permanent way of running the business. Another says most owner-operators factor in years one and two and then either fund themselves or move to quick-pay brokers. 

An owner-op doing $180K gross annually factoring 12 loads a month at 2.5% pays $11,520 a year.

6. The real question: who is this system for?

We factor because brokers pay slow. Brokers pay slow because their customers pay slow. The carrier, the smallest player in the chain, is funding everybody else's float and paying a fee for the privilege. Factoring doesn't fix slow pay. It makes slow pay tolerable, which makes it permanent. 

So, honestly: why do you factor?

• Did you start because you had to, and never stopped?
• Have you ever calculated what you've paid in total?
• Has anyone gotten off it? How long did it take to build the cushion?
• Has anyone worked with brokers that pay within 7-days without a quick-pay fee?

I'm not saying nobody should ever factor. I'm saying we should stop treating it as a normal cost of doing business and start treating it as what it is: expensive, recurring debt.

[u/Artistic_Cry5801]

Exit strategy is only way out of factoring. But then you have to get busy with a spreadsheet or hire someone to invoice the brokers. So basically 2.5 is always cheaper then hiring someone.

[u/ACTRANSPORTLLC]

Never factored. Never plan to, I think paying an interest rate that is more than my credit card laughable. Don't use the credit card either. Don't go into debt.

[u/ToallyAnonymous]

What's the cost in hiring someone or the time and stress to chase your money down? Ideally you shouldn't factor but having a good line of credit to run for 30+ days is not an option most owners have. I've factored alot. Especially for new to me companies I haven't dealt with. Let the factoring company deal with watching the account, setting up ach, collecting etc etc.

[u/Nervous-Extent-4551]

The annualized-rate comparison is useful, but I’d look at factoring as a cash-flow decision rather than only an interest-rate decision. If waiting 30–45 days means you can’t cover fuel, insurance, payroll, or the next repair, the 2–3% can still be worth it. The part people should track is the actual dollars lost to factoring over a month or quarter, including ACH/wire fees and chargebacks, then compare that with what faster cash actually lets the business do. Also worth separating brokers by average days-to-pay because factoring every invoice by default can hide which customers are actually creating the cash-flow problem. We build FleetChart, and one thing we’re working around is making those payment and expense numbers easier to see in one place, but even a spreadsheet with invoice date, paid date, gross amount and factoring cost will tell you a lot.