CHATTANOOGA–Factoring is generally defined as a transaction between a factoring company in the middle of a relationship between a broker or shipper on one side and a carrier on the other, with the latter being paid more quickly by the factoring company who then turns to the shipper or broker to collect.
But the weak freight market, combined with other economic problems, means factoring companies now find themselves waiting longer to get paid by whoever hired the carrier in the first place, according to Bryan Alsobrooks, president of factoring company Phoenix Capital.
Alsobrooks spoke about the consideration in a fireside chat at the FreightWaves Festival of Freight (F3) conference here. He was interviewed by the author of this article.
“We’ve seen a number of shippers that have unilaterally decided to go from net 30 days (payment days) to net 45 days, to net 75 days, to net 90 days, or even to net 120 days,” Alsobrooks said. “So they try to play the cash flow game.”
But even if the pressure is on the factoring company, since the carrier would have already been paid, the longer payment terms impact the factoring customer, Alsobrooks added. “We need to set higher prices if we want to take longer to get reimbursed,” Alsbrooks said. “So it really erodes the margin of the carrier or the broker that is already reduced.”
There is still a lot of talk in the industry about shippers wanting to build strong relationships with carriers, even in a weak freight market, in anticipation of the market downturn. But extending payment terms by several months is generally not the right way to go about this.
It’s clearly the shippers who currently have the upper hand, Alsobrooks said, “so they can kind of determine and dictate the terms.” But he added that it could stem from legitimate issues of “credit deterioration, and they were doing it to try to extend and use their money to pay others, basically in the mentality of robbing Peter to pay Paul.”
This strong position of shippers means they can act in ways they probably couldn’t in a strong freight market. “There are enough carriers in the market that think we can try to stick with this one because we know someone else will take the freight and move it for us,” Alsobrooks said.
Factoring companies cover a wide spectrum in terms of size. In its latest earnings report, Triumph Financial (NASDAQ: TFIN) said its factoring segment factored approximately 1.73 million invoices in the third quarter, worth just under $3 billion.
In contrast, Alsobrooks said various factoring companies have approached Phoenix about being acquired by the larger company, and some of them are small enough to process only about $8 million in invoices each month.
“There’s been quite a bit of consolidation in our business, especially over the last year,” Alsobrooks said, “whether it’s just the portfolio (which was sold) or the company as a whole, the portfolio and the staff.”
Phoenix said it preferred to acquire an entire company because staff who maintain relationships with factoring clients create value beyond just the size of the book of business. Without existing staff, some of the company’s customers are “running away,” Alsobrooks said.
The consolidation trend won’t stop anytime soon, Alsobrooks added. At a recent factoring conference in Chicago, he said four companies had approached Phoenix executives expressing interest in an acquisition. They ranged from this $8 million business to a business with over $50 million in monthly volume.
“Just looking at the cost of doing business and trying to get more efficient processes, they look at that and say ‘we need to do something,’” Alsobrooks said. Being acquired by a company like Phoenix, which in turn is owned by Gulf Coast Bank & Trust Company, may be a way out of this dilemma.
The biggest question Phoenix examines in a factoring acquisition, Alsobrooks said, is the cost of funds versus the cost of funds for the company it is acquiring. “If we extract their cost of funds and plug in our cost of funds, what are the immediate savings we see, without doing anything else,” he said.
As a bank subsidiary, Alsobrooks said Phoenix’s cost of funds is generally close to the prime rate, which is now 7.25 percent. “But there are companies that have to pay eight, nine, 10% depending on their capital structure,” he added. “It makes the competition very difficult.”
“The margins in our business are continually contracting,” Alsobrooks said. “Years ago I thought maybe we had hit bottom, but it seems like prices are continuing to fall.
But despite these tough times, Alsobrooks said Phoenix “continues to see new entrants into the market every year.”
New companies may come from a bank or another company operating in another market.
“I always warn that I think it’s a little dangerous,” Alsbrooks said of newcomers. “It’s one of those sectors that I think is niche and requires understanding what keeps transportation companies up at night and where their challenges lie.”
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Factoring companies have been squeezed by slowing shipper payments: Alsobrooks appeared first on FreightWaves.
