Freight Factoring Contracts: What To Watch For
Thinking of factoring your trucking invoices? It’s a great way to ensure consistent cash flow, even when shippers and brokers take weeks to pay. The concept of factoring is simple enough: It’s a financial tool in which a third-party company buys your open invoices for their full amount, minus a small percentage fee. The factoring company then collects payment from your debtors, the brokers and shippers who hire you. But factoring can range from easy and straightforward to complex and full of surprises. It all depends on the partner you choose.
In fact, most factoring companies force trucking companies into restrictive factoring contracts—and those contracts can be full of confusing language. Keep reading to learn what to watch for, and keep this guide handy as you compare providers and review factoring contracts.
Contract Vs. No-Contract Factoring Agreements
Your most important choice about a factoring contract is whether to sign one in the first place. The truth is, you don’t need a contract to factor. Bobtail is a no-contract factoring tool that gets you funding without locking you into long deals or complicated requirements. If you value freedom in the way you run your business, no-contract factoring is the way to go.
To understand why, just consider the common terms and conditions of factoring contracts. Contracts require you to deal exclusively with one factoring company for a term that could be as long as three years. If you want to leave early, you could be hit with a termination fee. Companies often build volume requirements into a factoring agreement, meaning they may require you to factor most or all of your invoices through them. The contract may even give them say over who you work with.
No-contract factoring with Bobtail keeps you in the driver’s seat of your own business. Factor as many or as few invoices as you prefer, all with a single, uncomplicated factoring fee. You can leave with 30 days’ notice at any time—with no termination fees of any kind. If you do choose to review some factoring contracts, however, keep the following points in mind.
Recourse Vs. Non-Recourse Factoring Contracts
Factoring contracts may describe two broad types of agreements—“recourse” and “non-recourse”—to handle a potentially costly event. What happens when a broker or shipper hires you to haul a load, then goes out of business before they pay? The factoring company may come back to the trucker for those unpaid funds. Non-recourse agreements include collections insurance; essentially, they make it so factoring companies can’t seek payment from their own clients when a debtor declares bankruptcy.
Recourse agreements don’t include this insurance. There’s a clear trade-off there—but in practice, as we’ve written, the higher costs of non-recourse factoring agreements outweigh the benefits. For instance, unless the broker or shipper files the right paperwork, the collections insurance may not protect the trucker.
Even worse, non-recourse contracts often give factoring companies control over who you work with. These companies may decide a broker’s credit isn’t good enough to factor their invoices—even if it’s someone you’ve been working with for years. In short, a non-recourse factoring agreement may sign away some control of your company for years at a time. Watch for these terms in factoring contracts.
Holding Reserve Funds On Factored Invoices
Reserves are another common feature of standard factoring contracts. So, what’s a reserve? It’s a sort of security deposit a factoring company holds for each invoice, sometimes up to 10% or 15% of the total invoice value. The factoring company places these funds in an escrow account and releases them back to you when the debtor pays the bill. If you factor all your invoices (as some contracts require), that can lock up a significant portion of your revenue—and it leads to complicated accounting.
Factoring companies give you your reserve when the debtor pays. That means there’ll be a constant stream of odd amounts of money being released back to your business. You have to account for those funds in your books, which adds a lot of time and complexity to the bookkeeping process. At Bobtail, we don’t hold reserves. Most factoring contracts do, so look for those details in the contract.
Buried And Hidden Factoring Fees
Most truckers just think of a single factoring fee when budgeting for their businesses. That’s the percentage the factoring company charges for their services. At Bobtail, for instance, it ranges between 1.99% and 2.99% based on monthly volume. And at Bobtail, that’s all you’ll pay—but traditional factoring companies often stack hidden fees into their agreements.
These fees, however, should all be listed in the contract. In fact, going through the contract with a fine-toothed comb is the best way to avoid surprise charges down the line. As you review the agreement, look for additional fees, which may include:
- Wire, transfer, or ACH fees. Factoring companies send funds electronically, for which financial institutions may charge a small fee. Many companies pass these charges on to their clients in the form of hidden fees.
- Expedited funding fees.The whole point of factoring is that it gets you paid for your invoices faster. Still, if you want same-day funding, many companies will charge a premium for the service.
- Setup fees. You may be charged for the factoring company to establish your account in the first place.
- Noncompliance fees. Contracts may set factoring requirements explicitly, and if you don’t factor enough invoices, they may charge you an extra fee. This condition can go totally hidden until you try to leave the factoring company, which is when a lot of surprise fees tend to surface.
- Termination fees. Here’s another common charge built into factoring contracts. If you try to break off the relationship before the end of the contract term, the company may charge you on the way out the door.
Of course, this list doesn’t include everything. Some companies charge a fee if you accidentally deposit a check from a broker instead of sending it to them. Some charge extra if you don’t make your minimum factoring volume. Some even change the factoring rate based on when the debtor pays. Look for all these potential hidden fees in the contract; they can stack up quickly.
At Bobtail, we keep things simple. All you pay is the factoring fee, and because we don’t lock you into contracts, there’s no lengthy legal document to hunt through for surprises.
Best Practices When Comparing Factoring Companies
If you’re looking into factoring companies that require contracts, be sure to read the whole document. That’s easier said than done, but the devil truly is in the details. As you consider factoring partners and their contracts, follow these tips to make the best choice:
- Review the contract’s “Termination” section in detail. If you want to get out of the contract, what’s the procedure? This section of the contract will tell you how to terminate the factoring agreement. Some companies will only let you out within a small window after you sign the contract—sometimes as few as 30 days. Look for information about termination penalties and non-compliance fees. Be sure to note the length of the contract, and see if it auto-renews. Many do! Finally, see if you can deliver termination notices electronically. Lots of factoring companies require paper termination letters, which can be a hassle to mail.
- Pay close attention to the contract’s “Fees” section, too. It also doesn’t hurt to look for extra fees buried elsewhere in the document.
- Go beyond the contract. Read reviews from other trucking companies to see how these contracts have affected other businesses. Look through review platforms—the Better Business Bureau (BBB), Trustpilot, Google, even Facebook—for first-hand accounts of others in your position.
- Ask for a trial of the factoring company’s portal. Contracts alone aren’t the only thing to consider when choosing a factoring partner. The quality of the technology is also an important consideration—and not all factoring portals are easy to navigate.
- Look for a company that delivers great service and the best technology. Rates and contracts alone aren’t enough to make the right choice. Go with a factoring company that will be a reliable partner for the long haul—and make sure their software tools make it easier to manage your business, not harder.
If all this information is enough to make you want to skip the factoring contract altogether, reach out to Bobtail. We built our no-contract factoring tool to make funding as simple as possible. Just open the app, upload your rate confirmation and bill of ladings, and get funded—on the same day, if you send the request before 11 a.m. We don’t charge any hidden fees. We don’t hold reserves. There are no volume requirements, and you’re free to come and go as you please. If you have any questions, our helpdesk is always available, and we pride ourselves on responsive customer support.