There’s a service that is vital to startups and businesses that want to grow. It is a service where the factor purchases a company’s invoices at a discounted rate. The factor pays the money that’s due minus the factoring fee then and there and collects the money that’s due from the client listed on the invoice. If your client owes you $10,000, you could get paid today for a fee that’s often no more than 5%.
Factoring services can be the key to success in a turbulent industry. However, it isn’t a decision to rush. A company with the lowest rates may seem appealing, but not if those low rates come with poor customer service or limited services. There are key questions to ask before you sign a contract with a freight factoring company.
The Company’s Experience and Customer Satisfaction
Ask questions about the factoring company’s experience. How long have they been in the business? What experience do they have in your specific industry? If you’re a trucking company owner, you don’t want to pick a company that admits they’ve only factored invoices for food manufacturers.
Also, look at the customer support details. If support is only available via chat from noon to 5 p.m., that’s not going to be helpful to a trucking company that does the bulk of its deliveries before 9 a.m. If they’re only available via phone, it’s not helpful to you when you’re on the road.
The Factoring Rates and Fees
Make sure you ask questions about the factoring rates and fees. Make sure you’re clear on when the fees are deducted, how they’re calculated, and whether there are hidden charges or fees that may appear later. This includes things like a fee for your client paying a day or two late or a fee for not meeting the minimum quota for invoice submissions.
As some freight factoring arrangements provide you with a percentage of the money that’s due now and the balance when your client pays, make sure you understand the process. If you get 90% now and 10% later, are the fees taken out all at once from the 90% or partially on the 90% now and then the 10% portion later?
Are the arrangements and fees based on a recourse or non-recourse arrangement? How much does it cost if you decide to enter a more protective non-recourse arrangement?
What about fees that are out of the hands of your freight factoring company? Does your bank charge a transfer fee?
The Reserve Factors and Advance Rates
With most factoring arrangements, you do not get everything you’re owed upfront. If you have a factoring agreement with a 90% factoring advance rate, you get 90% now. The remainder is held in a reserve account until your client pays the invoice.
Suppose you transport a load and are owed $20,000. You submit that bill of lading to the factoring company to get 90% now and 10% later. There’s a 3% factoring fee, which means you automatically give $600 of that $20,000 to the factor. You’re still going to get $19,400. But, the factoring arrangement gives you 90% now, so you get $17,460 right now. The remaining $1,940 is set aside until your client pays.
This leads to another aspect of factoring. Your client must pay that invoice. If not, you could be obligated to repay the funds you received. If you don’t have that money to pay back, you could end up with dings on your credit or loss of anything you used as collateral.
There are non-recourse arrangements that offer some protection. You won’t have to repay the money provided your client didn’t pay the invoice due to an unexpected closure or bankruptcy. This is why business credit checks are vital.
Turnaround on Payments
Once you’ve submitted a bill of lading, how long before you get paid? If you submit the bill of lading at 9 a.m. after dropping it off, will the funds go to your gas card that same day or are you going to wait a few days?
If you send funds from your factoring accounts to your bank, how long does it take to complete the transfer? Is this competitive or would you be better off with a different company?
Business Credit Checks
Most factoring companies provide business credit checks. However, some charge a fee for each credit check after you’ve used a monthly quota. If you’re allowed 20 free credit checks, how much are they after that? Ideally, you want to partner with a factoring company that provides unlimited free business credit checks.
Flexibility
Once you enter into a contract, is it flexible or are you locked in? Say you have doubled the workload a year from now and want to renegotiate your factoring fee, is it possible? If you have a recourse arrangement and are ready to switch to a non-recourse arrangement as you take on new clients, can you make the change quickly or is it going to be a struggle?
Legal and Contractual Terms
Don’t sign up without reading the terms and privacy policies. You also want to read the contract before you sign it. If anything is unclear, consult an attorney. It’s a good idea to talk to an attorney first with any contract. You specifically need to know if:
- There are early termination fees.
- There are penalties for not factoring a certain number of invoices each month.
- You’re obligated to factor every bill of lading you get from a client and can’t pick and choose.
- There are hidden fees that are only broken down deep within the fine print.
Website and App Security
As freight factoring is a financial service, your security is important. Make sure you ask how your information is protected. If you’re unsure if an app is secure, stick to the website and use the tools in the toolbar or menu to check the site information for security details.
On Chrome, it’s an icon with two slider bars that’s on the left of the website address. You’re looking for a valid certificate and the locked padlock icon to ensure the site is secure.
TBS uses VeriFast, which provides a secure platform and KYC (know-your-customer) protocols. VerifFast holds AICPA SOC 2 certification to ensure security.
Additional Services
Always ask about additional services. Fuel discounts and carefully negotiated rates on truck and business insurance are important. You might also want to see if there are options like load-finding boards available to clients who sign up for freight factoring.
TBS provides the services, security, and support needed to factor your trucking company’s invoices without a hassle. Get paid the same day and enjoy additional services like fuel and insurance discounts at the same time.