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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 accounts receivable 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.
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