Checking a customer's credit before you factor an invoice
So you’ve been working with a trucking factoring company for a while and you’re hearing a lot about credit checks and that factoring companies require their clients to perform them prior to factoring a load, but you don’t understand why. It’s no different than going to the car dealership and having your credit run to see if the finance company will provide a loan to buy the car. Everything comes down to historical trends predicting future outcomes. It’s all about risk and how much a certain company is willing to take.
It’s the same concept for a trucking factoring company requiring their clients to check credit on their customers prior to running a load. The trucking industry has very low barriers to entry so new brokers, manufacturers, shippers, etc. are popping up all over the place trying to ship goods from point A to point B. Just because someone has a product to move, doesn’t mean they have the financial capability to pay for the movement of the freight. What happens when the company selling/moving the product is selling to another company who doesn’t have good credit either? What are the chances that ‘Company No-Name’ will actually pay their bills at the end of the day?
What happens when a new shed building company sells a new shed to a new farm? Both companies just started within the past year and both companies don’t have the necessary tools to be successful. One of them is bound to have a hard time fulfilling their financial obligations. They hire a trucking company to transport the movement of the shed and they’re expecting to get paid in the next 30 days. Would you feel comfortable hauling freight for these two entities if you knew they had no experience? This is the same type of scenario that freight factoring companies see everyday with their trucking clients. Sometimes a load seems too good to be true and often times it is.
Checking your customer’s credit is critical to ensuring that your transportation factor will even buy the invoice in the first place. Transportation factoring companies aren’t in the business to just buy pieces of paper and cross their fingers hoping to collect. They’re purchasing an asset; a receivable to be exact, and they expect to get paid on the invoices that they’re buying.
Everything comes down to historical payment trends. In credit, historical transactions predict future outcomes and results. If a car dealership pulls your personal credit and notices that you’re consistently late and have missed a number of car payments over the past 7 years, what are the chances you’re going to qualify but also what are the chances you’re going to get a good APR rate? Not good!
This is the same for factoring. When you’re working with a good customer, everything should run smooth. However, every now and then your transportation factoring company finds credit that is less than desirable. The shipper or broker pays in 60 to 90 days as opposed to 30. From the factoring company’s perspective they’re probably going to want a better rate if it’s going to take them longer to collect. That might be why you see factoring companies hold a reserve on clients as opposed to provide a flat factoring rate. With more risk on the customers and longer days to pay, the factor will expect to be compensated.
OperFi understands these nuances and seeks to educate our clients on the importance of credit checks and understanding the difference between working with a slow paying customer and one that has good credit. Ultimately, we want our clients to be successful so we want them to understand the transaction, understand credit, and at the end of the day their business will be much better off for that.