Factoring Contracts: What Trucking Companies Must Check Before Signing
If you're reading this, chances are you're considering factoring for your trucking company. Factoring is common in trucking. It can help you improve cash flow, haul more loads, and grow your business. But like any financial decision, it's crucial to know what you're getting into. Let's dive into factoring contract details and what to know before signing on the dotted line.
Why are Factoring Contracts Necessary?
Factoring contracts are essential for several reasons. They benefit all 3 parties in a factoring relationship - your company, your clients, and the factor. Let's break down why these contracts are so important.
Benefits for Your Trucking Company
Cost Certainty: The contract outlines the fees you can expect to pay for the term of the contract. It locks you into a flat fee or a rate structure that will not change due to external factors.
Value-Added Services: Most factors package other services along with their factoring services. Common examples include credit checks, fuel cards, and fuel advances. The contract will outline what services are available at no-charge or minimal charge.
Contract Termination: At a certain point, you may not want to remain in your contract. You might grow unhappy with your factor. You may decide a different type of financing is a better fit. Or you may get to a place where you do not need any financing at all. In these cases, you'll want to know how you can end your contract. The contract should outline how you can exit when you're ready to do so.
Benefits for the Factoring Company
Risk Management: Factoring contracts help the factoring company manage risk. Clear terms and conditions protect the factor against potential losses due to non-payment or disputes.
Operational Clarity: Contracts provide a framework for how the factoring relationship will work. This includes the responsibilities of both parties. Such clarity helps streamline operations and ensures that both sides understand their roles.
Legal Protection: A well-drafted contract offers legal protection to the factoring company. It states the rights and duties of each party, reducing the chance of legal disputes.
Clear Communication for Your Customers
The factoring contract helps establish clear communication with your customers. As part of the contract signing process, you will sign a Notice of Assignment (NOA). This document gets sent to your factored customers and instructs them how to pay your factor.
Key Elements of a Factoring Contract
Types of Factoring
Recourse Factoring: You’re responsible if your customer doesn’t pay. You will have to repay the factoring company for any invoice amounts not paid in full.
Non-recourse Factoring: The factoring company assumes the risk of non-payment in some cases. If your customer is insolvent or in bankruptcy, then the factor has no recourse to make you pay the invoice. But in cases of short payments, misdirected payments, or any other reason, you may still be on the hook. This usually comes with higher fees but can be worth the peace of mind.
Advance Rates
The advance rate is the percentage of the invoice amount you receive at the time of invoice sale. In the trucking industry, it is common for advance rates to be higher than other industries. In other industries, advance rates can range from 70 to 90% of the invoice value. But in the trucking industry, one can expect at least 90% all the way up to a full advance.
Full Advance = Invoice Amount - Factoring Fees
Fees and Charges
Fee structures vary from company to company. Here’s the breakdown on common fees:
Factoring Fees: Usually a percentage of the invoice value from 1% - 5%. Factoring fee structures include:
Flat rate: The rate does not change depending on how long it takes to pay the invoice.
Variable rate: The rate changes depending on how long it takes to pay the invoice. Rates get grouped by a given timeframe.
For example "1% for every 10 days" would mean that you pay 1% for Days 1-10, 2% for days 11-20, and 3% for days 21-30.Daily rate: The rate changes depending on how many days it takes to pay the invoice.
For example, 0.1% per day would mean that you pay 1.2% for 12 days, 1.8% for 18 days, 2.4% 24 days, etc.
Monthly Minimum Fees: Some companies require a minimum amount factored each month. If that amount is not met, then they charge a monthly minimum fee.
For example, ABC Trucking is a 1-truck operation with a 3% factoring fee and $500 monthly minimum fee. In January, ABC Trucking factors invoices totaling $20,000 for a fee of $600. In February, ABC Trucking is off the road for a week due to mechanical issues and factors a total of $12,000 in invoices. Added to the factoring fees of $360 ($12,000 x 3%), the factoring company charges $140 to meet the monthly minimum.
Deposit Fees: Some companies charge a fee each time they deposit money in your account. Fees vary by payment method (i.e. direct deposit, money wire, RTP, fuel card deposits).
Processing Fees: Some companies charge a fee for each invoice they process.
Service Fees: Companies may charge a fee for account management and other services.
Late Payment Fees: If invoice payment occurs after the due date, a late fee may apply.
Due Diligence Fees: Some factoring companies charge a fee to review your application.
Early Termination Fees: If a contract has a term (i.e. 1-year), and you choose to end the contract early, then a fee may apply.
Reserve Accounts
A reserve account is a portion of the invoice value held back by the factoring company. This goes to cover any potential disputes or non-payments. Understand how this reserve is managed and when you'll get it back.
Factoring Contract Terms and Conditions
Duration of the Contract
Contracts can be short-term (month-to-month) or have a financing period (i.e. 6-month, 1-year, etc.). Consider your business needs and flexibility before committing.
Termination Clauses
Know the terms under which you or the factoring company can end the contract. Are there penalties for early termination?
Renewal Policies
Some contracts auto-renew. Make sure you know how to opt-out if you decide factoring is no longer right for you. Most contracts require a 30-, 60-, or 90-day written termination notice.
Rights and Obligations
Rights of the Factoring Company
The factoring company will have the right to collect payments from your customers. Make sure you’re comfortable with this and that it won’t affect your customer relationships.
Obligations of the Trucking Company
You'll need to give clear documentation and openly communicate with the factoring company. Transparency is key to a smooth relationship.
Evaluating the Factoring Company
Reputation and Experience
Do your homework. Check reviews, ask for references, and talk to other trucking companies about their experiences.
Customer Service
Good customer service is invaluable. You want a factoring company that’s responsive and supportive, especially when issues arise.
Technology and Tools
Modern factoring companies offer online portals and real-time tracking. These tools can make managing your invoices and payments much easier.
Value-Added Services
Look for added services that can benefit your business, such as:
Credit Checks: Helps you assess the creditworthiness of potential customers.
Fuel Cards: Discounts on fuel purchases.
Fuel Advances: Immediate cash for fuel expenses.
Other Services: Load boards, insurance, dispatch, and more.
Legal and Financial Considerations
Legal Review
Always have a legal professional review the contract. They can spot potential issues and ensure protection of your interests.
Financial Impact
Consider the cost of factoring and how it will impact your bottom line. Sometimes the convenience of immediate cash flow can outweigh the fees, but it’s important to do the math.
Frequently Asked Questions
How do you get out of a factoring contract?
To get out of a factoring contract, you'll need to do 3 things:
Provide written notice: You'll notify the factor that you intend to end your contract. If you have a long-term contract, you may have an auto-renewal clause. It is common for these clauses to have opt-out dates either 30, 60, or 90 days before renewal date. You must send written notice before the termination notification window passes.
Wait out contract term OR pay early termination fee: If possible, you'll want to wait for the contract term to end. This will save you on potential early termination fees. If you cannot wait, then you may pay an early termination fee as part of the contract termination process.
Pay off invoices OR new factor buyout: If you have open invoices, you'll need to pay your current factor. You may choose to do this yourself if you have the funds. But in most cases, your new factor will "buy out" the invoices from the old factor. The new factor will help you with the buyout agreement process.
Case Studies and Testimonials
Real-Life Example
Here at Transwest Capital, a happy client got a quote from a competitor known for low rates and bad service. When told of their intention to leave, we advised them to review the contract due to aggressive terms. The client left us for lower rates but tried to come back 2 months later because of their poor experience. The only problem was that there was a $5,000 early termination fee with the other company. The client's only option was to remain stuck in a bad contract for the next 10 months until they could opt out.
Testimonial
This place was a Godsend! I was trapped in a horrible contract and they saved me! We have been with them for over 5 years and am very happy with their services. They are very personable and always willing to go the extra mile when asked and heck even when not asked. I love my team and appreciate the wonderful job they do.
Conclusion
Factoring is a great tool for truckers, but you must understand the contract. Take your time, ask questions, and seek professional advice. With the right factoring partner, you can keep your business rolling.
Ready to explore factoring for your trucking company? Contact us today to speak with our factoring experts. We're here to help you navigate the road to financial stability and business growth.
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About Transwest Capital
Transwest Capital has specialized in factoring for trucking companies since 2007. We are committed to delivering exceptional customer service to help our clients succeed.
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