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English: Brent Spence Bridge on I-75 over the Ohio River from Covington, Kentucky side facing Cincinnati, Ohio. On September 22, 2011 President Obama made a speech at the bridge. http://en.wikipedia.org/wiki/Brent_Spence_Bridge (Photo credit: Wikipedia)

The Brent Spence Bridge was originally designed to carry 85,000 vehicles per day and as a major corridor for freight traffic it is expected to need to support over 200,000 vehicles per day by the end of 2013.  The Kentucky Transportation Cabinet has ruled the bridge functionally obsolete.  The emergency break-down lanes were ripped out years ago to handle more traffic and with demands growing daily there is much debate going on about what to do and how to pay for it.  The what to do part is made difficult by the terrain, coming into Kentucky from Ohio the highway cuts a gouge through the side of a hill and climbs steeply through what was once the deadliest section of interstate in the country, referred to locally as Death Hill.

Many of the issues of Death Hill were corrected but the terrain and existing development on both sides of the river leave precious few options for how to configure a new or modified bridge.  Most of the  design options have several miles of  approach from both the north or the south being impacted, this is going to be a big project if it gets done at all.

Engineers and politicians are pouring over the options trying to find a viable solution and with cost estimates coming in around $2.5B everyone is looking at where the funding will come from.  Spanning two states on a Federal Highway system also creates questions about who should be paying what at the federal, state and even county level.  The only thing for certain at this point is that no one is stepping forward with a clcear plan of how to get this work paid for.

Tolls

Given the price tag and the stiff arm from the federal government the discussion has recently centered on the likely scenario that this work will somehow involve tolling.  While local residents are organizing opposition to tolls proposals the stark reality is that tolling will likely be involved in this and most other meg-projects on the country’s decaying highway infrastructure.  A recent  Tax Foundation study identified that the share of road spending  covered by fuel taxes, tolls and other fees amounted to at best a 59% coverage in Delaware and a low of 5% in Alaska.  The study further concluded that tolls and usage based fees will continue to increase as the costs of maintaining and developing new highway infrastructure continues to rise.

The Interstate Highway System comprises about 47,000 miles of roadway including 2,900 miles of toll roads.  The initial build cost of the entire system has been estimated at more than $400B which puts some perspective on the estimated $2,7B cost of the Brent Spence bridge project.  Federal legislation actually banned tolling on the Interstate Highway system though some of the early projects were grandfathered into the system.  Many of these roads, such as the Massachusetts Turnpike, are part of the system but are generally not allowed to receive federal funds for maintenance and improvement.

3P Partnerships

The SAFETEA-LU legislation passed in 2005 encourages the use of innovative financing in recognition of the inability for federal highway funds to support the costs of ongoing maintenance and development.  That’s Washington speak for tolls.  The Public-Private Partnerships, commonly referred to as 3P partnerships, are contracted partnerships between governments and private parties.  This economic development model is gaining increasing popularity across the globe and in the US Highway System as well.  The Ohio Department of Transportation, ODOT, and the Kentucky Transportation Cabinet, KYTC, are both engaged in a Value For Money study that is designed to look at options for funding and delivering this project.

3P ventures are generally a successful means of financing large projects that federal, state and local governments often languish over.  They can also bring people and resources to a project in a timely manner that bring innovative ideas and shared risk.  The inclusion of private money also brings with the need to see how that money is returned and for highway projects that almost always involves usage fees such as tolls.

It is too early to know if the new Brent Spence Bridge will be paid for with tolls but the opposition against them needs to come to the table with more than just demands against a federal government saddled in debt.  As more projects get completed in this manner expect more tolls on our interstate highways.  Carriers of freight bear a significant portion of tolls, especially in the critical I-71/I-75 corridor and a certain amount of traffic can be expected to be diverted based on those tolls.  Ultimately, the cost of these tolls will get reflected in the freight that is transported though the immediate is often felt first, and the sharpest, by the one paying the toll.

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In the process of qualifying a new client for a new freight factoring account, we will pull credit on both our clients’ customers, also called the debtors; as well as the credit history of all principal owners of the clients’ business.  Most clients understand why we are pulling the credit of the debtors, because after all, they are the ones responsible for paying the debt.  However, occasionally I get asked, Why do you have to pull my personal credit when my customers are the ones responsible for paying the invoice?

The answer is pretty simple.  We pull personal credit to see how you manage the money in your personal life.  Often times this can be an indicator as to how a person manages their business and consequently how they treat their customers and inevitably how they will treat their factoring company.  Fortunately we do not put a ton of weight into a client’s personal credit score.  We understand the issues involved with having a challenged credit score and we certainly understand the freight factoring industry.  Therefore, we feel that a well managed portfolio can overcome any obstacles that might arise based on a client’s sloppy business management styles.

Another reason we pull personal credit is to look for liens or judgments that may hinder our ability to collect on a particular factoring client’s invoices.  If, for instance, a client has a large federal tax lien, the IRS can, and will, step into the picture and demand all payments from existing factored invoices be sent to them, with no consideration as to how much money the factoring company advanced for those invoices.  The Federal tax liens will trump any and all rights to collect the invoice payments.

A debtor’s credit in the scheme of things is probably the most important.  If a debtor consistently pays between 30 and 45 days, they would be considered a good debtor; the main word being “CONSISTENTLY”.   When invoices are paid in 32 days and then 65 days and then 45 days and back to 70 days, it could indicate a cash flow problem with the debtor and it is probably worthwhile to do a little more research to determine why they are paying in such an inconsistent manner.  Often times it could just be from a claim on an invoice that took time to resolve or sloppy or missing paperwork with the bill itself. But, only a little research will help determine the real issues.

At the end of the day, the debtor is the one paying the invoice, so their ability to pay off a factored freight bill is obviously important.  However, a client that has poor records or poor billing practices can cause more issues with the collection of a factored invoice than the debtor’s ability to pay.  Poorly managed loads can have claims and poorly organized invoices will inevitably cause delay and frustration to the client, their factor and the debtor.  All parties will suffer.

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The Fiscal Cliff In Brief

The heart of the fiscal cliff issue is the expiration of Bush-era tax cuts that were no extended in the Budget Control Act of 2011 and signed by President Obama.  The purpose of that act was to stem the tide on the spiraling debt crisis and to ensure that the US Federal Government did not go into default.  The budget act increased the debt ceiling but also offered budget cuts in excess of the increase in the debt ceiling.  The act also called for a vote on a balanced budget amendment for the federal government, something that every state except Vermont currently has.

The Congressional Budget Office has estimated that full implementation of the  act would likely result in a reduction in the federal deficit from around 9% of GDP to around 2% by 2015.  Republicans in Congress are still fighting some of the provisions of the act, most significantly the expiration of tax cuts that were implemented in the Bush administration.  Effectively, the expiration of the Bush-era cuts will cause an immediate surge in tax rates including an increase in the capital gains tax rate from 15% to 20%, a new Medicare tax of 3.8% and overall higher tax brackets for individuals.

Trucking Impacts

One of the more serious implications of the act is the potential impact on taxation for trucking companies.  Many of the nations trucking companies operate as LLC’s where tax liability passes through to the owner at their individual rate.  The implication is that the tax rate of these companies will jump and that will need to be accounted for somewhere in these companies budgets.  Watching an additional 8% or more vanish from your bottom line is at the heart of many concerns over the fiscal cliff.

Such a dramatic rise in taxes has a lot of people; trucking companies and others alike, concerned about how this tax would be absorbed and whether the resulting set of actions companies are likely to take to offset this would create other, unintended consequences.  This is where the economists come into play and the picture gets very fuzzy.  No one can say with certainty what the impact would be at the macro level.  Certainly many businesses have weighed in on what they intend to do but there is not a consensus.

Some warn of devastating dire consequences that could trigger another recession while others view it as a speed-bump that we will pass over and the resulting reduction in deficits will have a booster effect on the economy overall.  The stagnation that is Washington will likely have a dampening effect regardless of what happens at this point.  There are reports that fleet orders are being held back to see how this plays out and even if a compromise were reached in Washington that minimized the concerns for trucking firms we have already slowed the economic machine and it will take some time to heat up again.  Most economists are predicting a slow Q1-Q2 period even in the best case scenarios and potentially a longer cycle of depressed activity if no action is taken and the act implements on Jan 1, 2013.  As the clock continues to move this scenario becomes all the more likely.

Waiting And Watching

What is your company planning on and what actions have you taken or intend to take as a result of the fiscal cliff?  Are you playing a “wait and see” game or are you actively preparing for a particular scenario?  Please share your thoughts on how you are preparing for the fiscal cliff.

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For a better understanding of this regulation read the complete story at the California EPA website.

The basic gist is that the reefer units on all vehicles that pass through California must demonstrate adherence to the regulation.  Compliance will require registering your TRU with the California Air Resources Board who will award you with an IDN that must be affixed to both sides of the TRU housing.

Both Carrier Transicold and ThermoKing have compliance assistance documents available to help find the information necessary to complete the required forms.

More regulation is not what anyone wants but keeping updated and on the right side of them always matters.  If you run reefer and you pass through California then make sure you know whether your rig is in compliance and what you need to do to either get it compliant or prove that it is.  Read the EPA article linked to above to get the complete story.

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With the economy struggling to heal itself and shortages of drivers still prevalent many retailers and grocery chains are moving to lock up guaranteed capacity via dedicated fleet services.  Shippers benefit not only from guaranteed capacity but also through better cash flow management as the transportation expense is typically understood in advance.  This also follows the trend of outsourcing what is not core to a business and for many retailers, though not all, logistics and transportation is not a competitive advantage.  Being able to leverage the core expertise of a dedicated fleet allows the customer to focus on it’s core business and removes some of the risk of managing their own fleet.

The result of all of this is an increase of driver hiring, which is overall good news for the industry.  As housing markets warm up and economic conditions improve, albeit at a painfully slow pace, the demand for more drivers is increasing.  J.B Hunt reports that they grew their dedicated truck fleet by 4.8% in Q3 2012.  That growth was slower than prior year growth but is still an overall positive marker for the industry.

Perhaps the most important aspect is the ever-tightening time lead times that customers are demanding to move loads.  As supply chain management improves the efficiency of many operations the transportation component will become a larger constraint and focus area for shippers.  Large shippers will demand shorter lead times which ultimately requires more capacity and/or more dedicated fleets to address the need for improved timeliness.

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Traditional banking is a great way to generate an operating line of credit.  These credit lines come in many different forms; the forms I run into the most are:

Personal loans

Personal loans require personal property or collateral to be pledged to guarantee the ability to repay the debt. Often times a personal loan is acquired by pledging real estate owned by the individual guaranteeing the loan, such as a home. The amount you can borrow is limited to the value of the collateral. All banks have different ways of underwriting risk, so you could expect to be able to borrow between 50% and 80% of the value of the collateral pledged.

Business Operating Line of Credit

A business Operating Line Of Credit is probably the most popular form of bank lending for businesses and it is very similar to the personal loan above in that several forms of collateral are needed to secure the line of credit. And like the personal loan, the amount of the credit line is limited to the amount used as collateral.

Accounts Receivable Line of Credit (ARLOC)

An Accounts Receivable Line Of Credit (ARLOC) is the most similar product to factoring that a traditional bank has to offer. With the ARLOC, the client submits lists of invoices (also called a schedule) that were sent to their customers and the bank will allow the client to borrow up to 80% of the invoice amount on the schedule. With these accounts, the customer will pay the client by sending money directly to a lock box at the bank so the bank can keep control of the incoming cash.

In fact, many bankers will argue that their loans are set up as a combination of all of the above; a personal loan, a line of credit and AR line of credit could all be used to generate a credit limit that you can utilize to run your business. And they would be right in that argument.

However, the main difference between a factoring company and traditional bankers is this:

1. TIME needed to close the deal, sign paperwork and get the line of credit in place
   • BANK: This can take weeks, if not months. The bank will need to review years of financial information on the company as well as get appraisals on all of the equipment or real estate used as collateral. Plus, you will pay for the appraisals.
   • FACTOR: We can underwrite and have an account ready for funding in 24 hours
2. CREDIT LIMITS
   • BANK: Credit limits will be limited to existing valuations of the company. If the company grows, it doesn’t necessarily mean that the credit limit will grow.
   • FACTOR: The credit limit is only limited the amount of sales you can generate. If the company doubles in size, so does the credit limit.
3. EASE OF USE
   • BANK: the bank will require that you submit quarterly financial statements and your credit lines can be adjusted down if you are not performing as needed.
   • FACTOR: We do not review financials and your program is not subjected to a quarterly microscope
4. ADVANCE RATES
   • BANK: Banks are traditionally limited to lending 80% of the invoice amounts
   • FACTOR: We will advance up to 95% of an invoice amount
5. EXTRA SERVICES
   • BANK: None
   • FACTOR: Billing and collection services, credit monitoring services, accounting services, accounts payable services.

At the end of the day, you have to decide what works best for your situation. For most companies that are growing at a rate of 25% a year and more, traditional banking just doesn’t work.  The credit limitations combined with the stress and workload needed to keep the bank informed quarterly can be too overwhelming.

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We take freight factoring sales calls every day and receive a huge array of freight factoring questions.  Here are some quick answers to our most popular questions:

Q: What are your factoring fees?

A: Rates will vary based on volume you want to factor.  As a general answer our clients will range in factoring fees from 1.25% up to 4%.  We are the most competitive in the industry.  If we want a deal we will price it right.

Q: How much do you advance on a factored invoice?

A: Depending on the program and the volume factored, it varies between 93% and 95%

Q: Do you require a contract term?

A: Yes, depending on the program you decide to take, or contract range from 6 months to 2 years.  Obviously the better the rate, the longer the contract will be.  But, our average contract term is 6 months.

Q: Are there any minimum fees associated with the contract.

A: No, we do not require that you pay a minimum factoring fee each month and we do not hide it in the form of an administrative fee.  We do require that you factor at least $1,000 per month to keep the account active because we have to be able to determine if you closed the business or decided to stop factoring.  But, again, there are no fees applied to the account for lack of volume factored.

Q: Are there any hidden fees?

A: No, our contract is easy to find all the fees associated with your factoring account.  The fee structure will be reviewed with you prior to factoring.  The only fees you will see are: factoring fee, invoice process fee (if you choose to factor with copies of the BOL) and WIRE fee (if you need same day funding).  These are the only fees associated with our factoring contract.  Of course, there will be default fees added to any account that is habitually not in compliance with the factoring guidelines of our contract.  Like all factoring companies, we need to protect ourselves from fraud and the only way to deter it is to penalize for it.

Q: Do we have to factor all of our invoices?

A: No, you may factor any client you want to factor as long as they are credit worthy. But, remember, the more you factor, the less you factor fee will be.

Q: Do we charge for credit checking customers to factor?

A: No, we do not charge for credit checking of debtors. You may credit check as often as you need. There is no limit and you may do it on-line

Q: Do we have ON-LINE Access to our account?

A: Yes, you will be given on-line access to you account where you can review and download account activity as well as check debtor’s credit.

Q: How long does it take to get set up an account?

A: Most accounts can be set up and funded in less than 24 hours.

Q: How do we set up an account?

A: To set up a freight factoring account you need to send us an application. You must have an active MC number with proper insurance. We will need to see copies of your driver’s license and a W9.  That’s it.

Q: My credit isn’t very good. Do you have credit criteria I have to meet?

A: We do not put a lot of emphasis on credit scores. We are able to set up factoring accounts for clients with credit scores in the 500’s.

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When Non-Recourse Turns to Recourse

I receive phone calls every day from clients in search of a great freight factoring program.  And I would bet that 1 out of every 3 calls I receive asks me if we do non-recourse freight factoring.  It’s a great question to ask and certainly something you need to research, but I am surprised at the number of people that don’t truly understand what they are looking for.

Anytime someone indicates to me that they want a non-recourse program I ask what specifically they want to see that led them to ask about non-recourse and 98% of the time they offer one of these two reasons:

1. They want to get all of their money up front with no reserves.  So, if you are charged a 6% factor fee, you would receive 94% of your factored invoice within 24 hours.
2. They don’t want to worry about whether the invoice is going to collect or not, they want to be in the clear if the shipper doesn’t pay.

I would like to address both of these points:

Point 1. – Getting the full advance:

Believe it or not I have seen non-recourse programs with reserves but typically you should get the full advance with no reserves.  For example 94% advance with 6% fee.  If you aren’t getting the full advance, you are probably being toyed with.  Reserves are typically held by the factor as protection against invoices that could be recoursed to the carrier.  If there is no recourse provision then it is not reasonable for a factor to hold reserves.  If you are presented a non-recourse deal that includes a reserve then you are being toyed with.  Our advice, keep looking.

Point 2. – It isn’t your problem if the shipper doesn’t pay:

Non-Recourse is too often not what you are led to believe, review your contract carefully for anything that mentions the term recourseThis is probably the biggest reason why people  say they want a non-recourse factoring program.  And it is clearly the biggest selling point any sales person will use to sell a non-recourse product.  The problem is, there is a big difference between what people are led to believe vs. what the contracts actually provide in terms of protection against non-payment.  Having reviewed countless non-recourse factoring contracts, I would estimate that more than 90% of “non-recourse” contracts have recourse clauses built into them.  As a general rule a contract will typically not mention anything that is not a provision of the contract so if you can find anything in the contract about recourse read very carefully.  It is highly unlikely that this section goes into detail about the fact that you can’t be recoursed against under any circumstance, generally the opposite is true; the contract will talk about the scenarios in which your “non-recourse” contract can be recoursed back to you.

The contracts I have seen typically say that uncollected invoices for shippers or brokers (we call them debtors) that have become insolvent (bankrupt, unable to pay their bills, broke and or closed) shall not be recoursed. BUT, if your debtor decides they don’t want to pay because their cash flow is slow and they don’t make a public filing of insolvency, that invoice can be recoursed and that premium you paid for a non-recourse agreement is now money wasted.

Here are some other situations that can trigger recourse in a non-recourse contract:
• Disputes between the carrier and the debtor
• Insurance claims on the load
• Potential claims on a load
• Potential short pays on a load
• Late delivery of a load

So think about the situations that you are likely to encounter in having your bills paid, if the scenarios are likely to be that the shipper or broker has gone bankrupt and is now out of business then you may find protection from these events.  If the more likely scenarios are any of other slow-pay / no-pay scenarios listed above many contracts we see allow for those events to be recoursed on.

A couple of other important points you may not have considered:

• Non-recourse factoring is expensive… often times rates are twice as much as a recourse factoring deal.
• When I talk with companies already using a non recourse factor, the first question I ask them is “ How many times has an invoice not paid where the factoring company had to write it off as a loss?”  I have only had one person tell me that they had that happen and I am not sure they were telling the truth.

So, of course the next question is:

• Who are the debtors you are factoring?
Anytime I speak with someone in a non-recourse deal I can pull my credit references and nearly always see that I can factor the same customers.  The difference is that I will charge up to 50% less than the current deal they have.  Further, the client will not see any difference in cash flow or recourse and their profits will increase automatically.

Think about it.  If a factor is assuming all of the credit risk then they should be much more stringent on who they will factor.  At the end of the day, all factoring companies treat an invoice and a debtor’s credit history the same way.  We all use the same credit sources and no one, including us, will factor a debtor if we feel they are not credit worthy.  So, why spend the extra money for a false sense of security.

If you are using a non-recourse factoring company or thinking about it and you want us to review your contract, we would be happy to do so.  If it is a good deal, we will tell you to take it.  If we think we can save you some money without exposing you to more risk we will explain that to you as well.  Either way, you win.  If you are interested in a FREE no-obligation contract review give us a call at 1-888-393-5061.

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By using 5 Star Freight Factoring for your trucking factoring demands, you can be assured of a continuous cash flow which means that your company runs more efficiently.  Wouldn’t you be more comfortable if you had been paid promptly while not having to wait for settlement?  Of course you would, which describes why 5 Star Freight Factoring is in business, we will purchase your truck industry bills and then pay you for the receivables factored, which in simpler words is really what trucking factoring is about.

What Are The Advantages To Truck Factoring?

At the moment you could be wondering exactly what additional benefits there are to trucking factoring.  Without the stress connected with cash flow, truck factoring lets you take on additional work by accepting jobs that have better paying loads.  We at 5 Star Freight Factoring have all been truckers so we all know just how essential it is to build your business and stay on top of your expenses even though settlement from your customers hasn’t yet come.  With truck factoring, worrying about cash will be a thing of the past.  You have the option of factoring every one of your accounts or just one or two if you prefer.  In simple terms, we tailor the truck factoring process to fit your requirements and build a program specific to your needs so that you will always be in the driver’s seat in regards to how truck factoring is employed by your transportation company.

Factoring your freight bills can provide the cash necessary to keep your trucks on the roadKeep in mind, when choosing 5 Star Freight Factoring as your truck factoring organization, you’ll be able to get cash within 24 hours.  With some of the highest advances and lowest factoring rates available, we keep your costs low.  We require no minimum invoices and no long-term contracts.  In addition, you have internet access to your account information at all times that provides simple web based management tools, like online broker credit rating, 24 hours a day, 7 days a week.

Working with a trucking factoring company like 5 Star Freight Factoring means that you are dealing with specialists in the truck factoring industry.  We understand trucking and we understand the role that cash plays in keeping you on the road.

So regardless if you are a start up company or perhaps you’ve already been in business for a long time, 5 Star Freight Factoring focuses on delivering customized truck factoring programs to match the requirements of all sorts of transportation firms without the headaches, hassles and double-talk of some other providers. As truckers ourselves, we all know the trucking business and therefore we get the trucking factoring job done properly and we accomplish it quickly.

Call today and experience the 5 Star difference.  5 Star Freight Factoring is a smarter way to factor.

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