'Works In Progress' Can Be Costly
Speed up payables to meet factor's credit terms
Q We are a small carrier that factors its receivables. We pay a healthy interest penalty for freight charges not collected in 30 days, yet almost nothing seems to get collected without us owing the extra month’s interest. What can we do to speed up payables and avoid this additional penalty?
A As I have suggested before, accounts receivables management in a season of bankruptcy particularly is important. This especially is true if you are giving your customers in effect interest-free loans on their payables and paying high factoring costs for the shipper’s float. Because of your delay, payments can be your customer’s fault, the factor’s fault, your own fault, or a combination.
In hard times, many customers with funding problems let their accounts payable drag, particularly to vendors that do not hold them accountable through close accounts receivable management, interest and attorney’s fees provisions, etc. Motor carriers traditionally have lacked the leverage or the bravado to insist on timely payment. This is a particular problem for small carriers and may be an issue for you.
Also, it has been rumored that some factors can double their return on investment when each outstanding receivable matures past 30 days – either by passivity or design. Like the $15-per-day parking lot that always charges $30 if you stay past 12:01 a.m., your factoring terms may be working against you in a way that likely could be cured by average day-to-pay financing that would charge you only incremental rates for more than 30 days.
Finally, you may be the source of much of your own problems. If you factor your receivables on the day of delivery by fax or e-mail, and then use snail mail for invoicing and payment to the factor, you easily can count 10 days to two weeks in additional float, which can increase your receivables by as much as 50 percent. For example, if your factor books a receivable before the date of delivery, and then the POD rides around in the truck for a week before invoicing, at least seven days have been added. If you then bill by mail, another three or four days are added before the payor’s payment clock begins to tick. By the time the check is cut, stamped and mailed to your factor, an additional three or four days is lost before delivery and deposit. Therefore, assuming your payment terms are 30 days from receipt of the POD, your float – and your factor’s aging – easily can be 40 to 45 days.
To combat the “works in progress” delay in payment, larger carriers are insisting upon electronic data interchange (EDI) invoicing without POD. Utilizing power tracking and other EDI, they have been able to satisfy their customer that delivery of the product has been made without the POD. In many instances, the POD is provided only upon written request and for a fee. Shippers interested in streamlining their processes have accepted this alternative billing approach; in fact, many encourage it.
Using ACH and other bank-to-bank depositing mechanisms, the lag time and uncertainty of the “check in the mail” approach also nearly can be eliminated. Major shippers have outsourced their payments to third-party providers such as US Bank that set up speedier fee-based protocols for providing funds. Also, larger brokers often provide fee-based “quick pay” and other alternatives to factoring and the old system of advances.
Finally, even when dealing with a transactional broker who insists on an invoice with accompanying POD, much of the “works in progress” time can be eliminated by e-mail. Instead of drivers riding around in the truck for a week or more with original PODs, they can use in-truck scanners to send a copy to the carrier’s accounts receivable department on the day of delivery, or fax a copy from any truckstop. Without adulterating the original, the carrier can scan in the faxed copy, placing on it a certification that reads, “I certify this POD is evidence of service provided by [Name of Carrier].” In turn, this certified copy can be sent with the invoice by fax or e-mail to the broker. Unlike snail mail, this method of billing not only eliminates delay in payment, it also gives a firm date for receipt of document by the broker, while also allowing the broker to present the invoice to payment for its shipper more quickly.