Companies across the US are extending pay terms, leaving suppliers to pay the price.

Days payables outstanding at the nation’s 1,000 largest companies averages nearly 57. More than 40% of all shippers require pay terms greater than 30 days. Some of the nation’s largest companies even stretch days to pay to 120.

Extended pay terms financially strain suppliers, especially smaller businesses susceptible to cash flow struggles. This is particularly true for transportation providers, 97% of which fall into the small business category with fewer than 20 trucks.

Factoring addresses conflicting capital interests between companies and their suppliers by providing accelerated receivables at a fee. If leveraged correctly, factoring improves liquidity and profitability for suppliers. However, lack of understanding sometimes leads people to give factoring a bad rap as a poor business practice rather than a helpful financial tool. Those individuals might be the ones leaving the most money on the table.

Bad Rap #1: “Anyone who factors isn’t running their business properly.”

Transportation requires many large upfront investments for equipment and insurance, in addition to several thousand dollars spent weekly for fuel and pay. Businesses must have good cash flow to survive, which factoring provides. Receivable delays have a ripple effect contributing to financial impacts like late payment fees, loan defaults or credit line interest that could cost a transportation provider more than a factoring fee. Extended pay terms also stymie business growth in an industry currently short 50,000 drivers. Every business is different; therefore, factoring does not indicate poor cash management. Rather it shows companies working to thrive in this very capital-intensive industry.

Bad Rap #2: “I do all the work for you to get paid.”

The right factoring partner should decrease a client’s workload. Good factoring companies, like FreightRover’s partner Rover180, assume responsibilities for much of the back-office work around payments. First, factoring companies check shipper credit before a carrier picks up a load to ensure they are hauling for solvent businesses. Clients then submit invoice images by mobile phone or email. The factor issues payment to the client and collects on the invoice as it becomes due from the payor. The transportation provider can spend their time and resources moving more freight rather than calling multiple shippers collecting on invoices.

Bad Rap #3: “I’ve got bad credit. Factoring won’t help me.”

Factoring cares about the credit worthiness of the shipper/payor, not the payee. Many transportation providers that struggled with credit in the past prefer factoring. It often results in a lower rate than high interest short-term loans and provides quick payments to businesses unable to obtain credit otherwise.

Bad Rap #4: “You never know what you’ll actually be paid when you factor.”

Not all factoring companies are created equal. Understanding the factoring contract is key to managing receivables and knowing deposit amounts in advance. Some factoring companies offer a low invoice factoring rate, and then make additional money from monthly minimum requirements, invoice processing fees, and payment issuances. Other factoring companies might offer a slightly higher factoring rate and eliminate all other fees. Non-recourse agreements command higher rates than recourse. Factoring companies also consider how quickly they receive payment on invoices. Shippers with extended terms beyond 30 days could prompt higher factoring rates on invoices to account for the cash float. Businesses that know their contract and shippers, know their receivable amounts due.

Bad Rap #5: “Factoring costs too much.”

Companies have many financing options for their business, and factoring represents one of them. Transportation providers should compare factoring fees to other options like loans or credit to see what rate works best for their business. Factoring often proves to be the lowest fee option. Many suppliers that factor include the rate in their linehaul agreements with shippers to get paid quickly without compromising overall income. Businesses also benefit from other savings factoring companies may provide around equipment, fuel and insurance.

Factoring also creates some parity among shippers. Freight decisions transition from when a transportation provider will get paid to better metrics like lane quality, utilization and load rate to maximize profitability.

Bad Rap #6: “Factoring takes too long to get paid.”

Factoring issues quick payments by design. If a transportation provider does not receive payment within 24 hours, which is industry standard, a broken process with the factoring company likely exists and it is time to ask questions.

Bad Rap #7: “Once you start factoring, you can never stop.”

Factoring companies work hard to keep your business, but you can cancel based on contract terms. Contracts for reputable factors include defined durations and reasonable termination notice periods. To switch factoring partners, the process typically requires a written notice of termination and an authorization agreement to transfer receivables. The new factoring company will issue notice of assignments on the transportation provider’s behalf to each payor to update them on where to send funds. Switching factoring companies does require coordination between all parties, but the cost savings can be worth the work.

Businesses letting the myths outweigh the math might be missing out on money. To learn more about how the best factoring companies set themselves apart, watch our quick video on FreightRover Factoring, test our savings calculator, or request the right questions to ask factoring companies.

FreightRover’s PayEngine provides a mutually beneficial supply chain finance program for companies and their vendors. Companies benefit from extended pay terms to improve working capital while providing their suppliers with tailored options for accelerated receivables.

Despite the wins supply chain finance provides both parties, many companies hesitate to implement a structured payable program due to balance sheet concerns. Poorly managed programs can result in trade payables reclassifications to debt, which negatively impact leverage ratios and debt covenants.

PayEngine’s program meets all trade payables accounting standards to protect a company’s balance sheet and bottom line. Following is our guide to understand the difference between a trade payable and debt in a supply chain finance program.

The First Question:
Has the economic substance of the trade payable changed?

When accountants review payables classifications on the balance sheet, they look at each of the following categories to assess if the trade payable has been modified in such a way that it is creating a financing cash inflow that benefits the company. Accountants will look at the categories collectively to assess the entire supply chain finance program as well.

Terms:

  • Settlement of trade payables cannot take place at a date later than or for an amount other than what is stated on the original invoice upon submission to a third-party payor. Doing so would be considered borrowing, which is debt.
  • A new trade payables arrangement cannot change the terms between a supplier and a third-party payor that’s inconsistent with normal trade payables terms.
  • The company cannot participate in or influence term negotiations between the supplier and third-party payor. The vendor and third-party must negotiate directly.

Population Impacts:

  • A trade payables arrangement must apply to a broad range of suppliers. However, the program does not need to include all suppliers. Companies can extend days to pay without all vendors accepting the new terms if most suppliers do comply.
  • Supplier participation in a supply chain finance program must be voluntary. If enrolling is required to maintain a relationship with the company, a debt reclassification may be required.
  • Should a large majority of suppliers impacted by extended pay terms select an accelerated pay option, which marks a significant change from the previous arrangement, this could trigger a debt reclassification. For example, if a company extends terms from 30 days to 120 days and now most of their supplier base elects to monetize receivables and did not prior to the change, this would require review as potential debt.

Benchmarks:

  • Companies can extend pay terms to align days payable outstanding or other working capital ratios with peers without changing the structure of their payables to debt financing. As a reference point, the US average across the largest 1000 companies currently is 57 days.
  • Trade payables should not include the accrual of interest prior to when the trade payables become due. Late payments can incur interest without reclassification impact.

Credits:

  • A company must retain its negotiation rights with the vendor directly and have the ability to withhold payment. Application of credits must be consistent with past practices. For example, if a company places a freight claim against a carrier, they should have the ability to withhold payment to the carrier until the issue is resolved. If a third-party payor compensates the carrier prior to the completion of the claim negotiation, and the company must arrange for a credit that’s inconsistent with how they’ve traditionally done business with the carrier, there could be a debt implication.
  • Whether or not a vendor decides to monetize their receivable cannot impact the company’s cost of goods sold or services received from a vendor. The third-party’s arrangement with the vendor and company must be independent of the other party’s interests. Therefore, a company cannot pay a vendor more to offset the cost of accelerated receivables.

Legal Characteristics:

  • Companies cannot change the legal characteristic of trade payables. Events that indicate characteristic changes include: immediate draw-down of credit lines, altering trade payable seniorities, securing trade payables through collateral, or incorporating default provisions.
  • In general, trade payables cannot have guarantees. However, in the case of a parent company being “jointly and severally liable for a subsidiary’s obligation,” a reclassification may not be required if it is the sole indication of a debt trait.

Impact of Third-Party Payor:

  • Implementing a structured payables program may be part of a larger accounting outsourcing strategy. This could include using a third-party platform like FreightRover’s PayEngine, which includes posting invoices and assigning accounts for fund withdrawals as payables reach their maturity date.
  • Rates paid to the third-party payor by the company cannot vary based on things like the number of vendors selecting a quick pay option or number of invoices sold to the third-party.
  • Red flags for debt reclassifications include: the third-party receiving new rights, if the third-party has influence on which invoices get paid, or if the third-party can withdraw funds from the company’s other accounts without consent if sufficient funds become unavailable.

If you are interested in learning more on trade payables or modifying your vendor payments using PayEngine’s technology and supply chain finance program, visit www.freightrover.com/pay, email info@freightrover.com, or call 866-621-4145.