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Date 10-10-2005
Many of our clients
qualify for other forms of financing sometime during the course of
our factoring relationship with them. While factoring is sometimes
viewed as an interim form of financing, the choice to replace a
factoring relationship with a banking relationship is not always an
obvious one.
Freight factoring is a financial method used by trucking
companies to convert sales on credit terms for immediate cash flow.
True, factoring provides growth capital that allows companies to
grow to the point where they can obtain credit from more traditional
sources of financing, like commercial banks. Often however, the
choice is not clear cut.
Recently, a large factoring client in a small, rural community
informed me that they had been approached by their local independent
banker, who had approved a line of credit for them. The client is a
trucking company running a fleet of 70 tractor trailers, generating
about $1 million per month in revenues.
The client has been consistently factoring about $1 million per
month and have about $1.4 million in outstanding factored accounts
receivable against which they have outstanding advances from us of
about $1.2 million.
One of our client’s larger accounts was Delphi, the large auto parts
manufacturer that filed for Chapter 11 bankruptcy protection the
second month of October. They had been hauling Delphi freight since
before becoming our client and continued to haul Delphi freight
until we contacted our client in July and warned them of Delphi’s
dire financial condition.
Although Delphi’s troubles had been widely reported in the financial
press, our client, so focused on obtaining loads, was unaware that
they were doing business with a shipper that soon, would be deemed
insolvent.
In most reorganizations, general unsecured creditors like our client
would expect to receive ten to twenty cents on the dollar for all
their pre-bankruptcy petition accounts receivable. Understanding
this, we counseled our client to begin reducing its exposure to
Delphi by reducing lanes it was covering. During the period between
July and the October filing date, our client reduced its Delphi
exposure to only $16,000 from well over a quarter million dollars.
Now, consider what may have happened if our client was borrowing
against its accounts receivable from a commercial bank instead of
factoring its accounts receivable. True, the cost of funds may have
been less, but would the lender have provided the credit guidance
our client received from us? Doubtful.
In the final analysis, our client made up the difference in the cost
of funds five fold by heeding our advice, reducing the volume of
business it was conducting with Delphi, and staying a loyal
factoring client.
By: 1st Commercial Credit,
Account Representative
1st Commercial
Credit, a
nationwide
factoring company headquartered in El Paso, Texas. Provides accounts
receivable financing in the US, Canada, and the UK; offers
export trade finance to clients in every major world
market and can convert receivable finance transactions in 17
currencies.
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US and Canada Tel 1 800 450 9653
United Kingdom Tel 0 800 404 9669
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