Freight factoring is a business saver for many small to medium trucking companies. Thanks to the quick payment provided by factoring companies, trucking companies can easily keep their businesses afloat. And it has factoring has enormous benefits over bank loans.
However, freight factoring isn’t all sugar and honey. Partnering with the wrong factoring company could cost your business more than it pays. And one way to spot potentially unfruitful factoring companies is through their contracts.
So, in this guide, we show you everything you need to understand about freight factoring contracts, how to make sense of them, and how to decide based on these agreements.
Before we begin, Trucker daily is a proud partner of Haulpay by Comfreight and if you would like us to introduce you to our exclusive factoring partner, visit this link and fill out the form to request more information.
What Is A Factoring Agreement?
A factoring agreement is a legal contract that guides the premise of the partnership between a freight factoring company and its customer.
This factoring agreement contains all the terms and conditions that bind a business and a factoring company together in business. The factoring agreement also stands as the financial contract where cost details of the partnership are described in clear terms.
As an owner-operator, carrier, or fleet manager, you want to take your time to know what is in your factoring contract. Some factoring companies hide some fees in here that you would be otherwise unaware of if you didn’t go through the contract.
Freight Factoring Fees, Terms, And Conditions
The following are the fees, terms, and conditions you may come across in your factoring agreements. Be sure to go through every detail of the agreement because some scrupulous factors hide some charges here.
Accounts Receivable
Freight factoring requires that you sell your invoice to the factoring company in exchange for cash. Your accounts receivable are the invoices you intend to sell. In other words, it is the amount your customers owe your business.
Some factoring companies mandate you sell all of your invoices to them. Others are flexible and they allow you to factor some of your invoices. Be sure to find out which category your factor belongs to.
Advance Amount and Reserves
Most times, factoring companies don’t pay the complete value of your invoice at a go. Instead, they pay an advance amount upfront, which is a percentage of your invoice value.
Your advance amount depends on various conditions, including your location, your invoice amount, and others.
This part of the contract is important because it tells you how much to expect from the company on each invoice you factor. It allows you to make accurate budget plans.
The reserve is the amount that is left after the freight factoring company pays you the advance amount. Your factor holds on to this reserve until your customer pays the invoice.
Assume you have an outstanding invoice worth $10,000 and the factoring company has an advance rate of 70%. This means the factoring company pays you 70% of $10,000, which is $7,000. This is your advance amount. Your reserve is the remaining $3,000 minus the commission. You receive this amount after your customer pays up.
Approving Credit
Freight factoring companies don’t just factor any business that comes to them. They approve based on creditworthiness. Not your creditworthiness, though, but that of your customers. Why? Because it is from your customers they’re collecting their payment from, not you.
As a result, they always have a system where they check the credit of your customers. But the part of approving credit that pertains to you is that you give your consent to the factoring company to check the credit of your customers.
If one of your customers tries to frustrate the effort of the factoring company in checking its creditworthiness, the company may drop the account entirely and refuse to factor it. However, your factor should still give you some time to discuss with this customer before it makes this decision.
Customer Limit
Your customer limit is the maximum amount your factor can fund you from the outstanding invoice from one of your customers.
Don’t confuse this customer limit with your credit limit, which is the overall limit you can get paid from all your outstanding invoices. For instance, your credit limit could be $50,000, but your customer limit for a single customer could be $6000.
Factoring Commissions
Your factoring commission is the charge the factoring company charges you on every invoice. This is what the factor keeps as its payment for factoring your invoice.
Factors that affect factoring commissions include the value of the freight, the invoice price, and some others.
Invoicing And Assignment Schedules
Say you deliver freight to your customer and you factor the invoice. You have to inform your customer to pay directly to the factoring company. You do this by stating on the invoice that the payment for that invoice should be made to the factor. And if the customer still goes ahead to pay into your account, you must return the money to your factor.
Your invoicing and assignment schedules are the accounts you have factored and when the payments are due. Some factoring companies require that you send them a list containing these details.
Minimum Sales Commission
The minimum sales commision is the least amount the factoring company requires that you pay them, regardless of whether you use its service or not.
This is a very tricky clause because some factoring companies are not usually upfront about this. When the company doesn’t mention it, it is your duty to dive into the agreement in search of it. In case you don’t find it, err on the side of caution and ask your factor. Don’t let them spring a charge on you that you didn’t prepare for.
Monthly Fees
You can also call the monthly fees maintenance fees. They are separate from the commission that the factor charges on each invoice.
Not all factoring services charge the monthly fee, but those that do will describe how they will charge in the contract.
Origination Fee
This is another fee that freight factoring companies charge, separate from the commissions on each invoice. The origination fee is the fee the company charges at the beginning of any contract. The cost varies depending on factors, such as risk analysis, the number of invoices you’re factoring, the value of the invoices, and many more.
Representations and Warranties
This is often a section in your contract with the factoring company where you attest to things like the legitimacy of your invoices, the viability and credibility of your company, and other similar things.
Upon violation of these representations and warranties, you put the factoring company on legal grounds to take legal actions against you or even deny your payment.
Factoring Contract Mistakes to Avoid
Now that you know the fees, terms, and conditions in a factoring agreement, you’re halfway through making smart factoring decisions for your company. The only other half is to know what factoring contract mistakes to avoid before getting into an agreement with any factoring company.
- Not reading agreement
This is a common mistake in freight factoring and any other sphere in the business world where contracts are involved. Never append your signature to a contract without fully reading the content of the agreement. It is only when you read the content that you know what you are contractually and legally committing your business to.
Some factoring companies hide some commissions in their contract and hope you don’t read the contract so that you don’t find them.
- Not understanding the content of the contract
Reading the agreement is one thing. Understanding the content is another thing. You must read and understand every clause of the contract. If there’s any part you don’t completely understand, don’t waste time in asking the factor.
- Getting tied to long-term contracts
Some factoring companies have clauses that tie your business to them long-term, and you couldn’t leave even if you wanted to. Others force you to factor freights you don’t have to factor. This way, you still pay them commissions on freights you would otherwise get paid completely for.
These are freight factoring companies you want to be wary of doing business with.
- Not knowing the requirements
Many businesses neglect the requirements of the factoring contract and they pay dearly for it. For instance, if your contract requires that you factor all freight, failure to factor any of your invoices could lead to the factor taking legal actions against your business. Apart from your outstanding invoices, know what else you are required to commit to this contract.
HaulPay and Its Flexible Contract
The contracts of many freight factoring companies are where you get to know if you’re about to get into a prospective partnership or a limiting partnership with our freight broker. Many freight brokers hide fees, requirements, and clauses in the contracts that cause your business to be tied against your will.
The best freight factoring companies are those that are flexible with their contracts. They don’t have clauses that imprison your business in their coffers and let you enjoy factoring without any forced commitment. Haulpay is such a freight factoring company.
In addition to the flexible contractual fees, terms, and conditions of HaulPay, you also get to speed up your factoring process when you do it on the company’s online portal. You can cut the factoring process down to as little as a day using this process, from application to funding.
Conclusion
That’s all about freight factoring contracts and agreements. We hope that by now, you know what mistakes to avoid with factoring agreements, and what fees, terms, and conditions to look out for in them.
While we tried to make this as exhaustive as we could, it never hurts to have a professional review the contract for you. You can never be too careful, especially when your business is what is at stake.