Key Elements of Freight Factoring

The Ultimate Guide to Choosing The Best Factoring Company for Trucking

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Part 2: The Key Elements of Freight Factoring



Introduction

Part 1 of this guide provides a basic understanding of Freight Factoring and explores the financial benefits it provides your trucking company. Part 2 identifies the main topics to be considered when selecting the best Freight Factoring company to service your needs.

Each of the following chapters focuses on a key element of freight factoring that will influence your decision when choosing a factoring company. The cost of factoring, speed of funding, customer service and the factoring agreement you sign are all significant components of the relationship between your company and the factor.


Chapter 2

Understanding Factoring Fees for Trucking

Understanding the basic principles of invoice factoring is relatively simple; it’s the selling of invoices at a discount for immediate cash. Understanding the different categories and types of factoring is a bit more difficult. Fathoming the convoluted and varying fee structures that are associated with each type of factoring is far more complicated.

Understanding the various fee structures and knowing how fees are determined will better prepare you to negotiate a better rate and recognize a good deal.

Learning Objectives

After reading this chapter, you should be able to:

  • Understand various pricing structures common to factoring
  • Identify the additional costs that could be associated with factoring
  • Have a better understanding of what type of factoring/pricing structure would bew best for your business
Definitions

Before reading this chapter, you should know the definitions of:

Factoring Fee: The fee charged by the factoring company to finance a client’s invoices. This fee is usually a percentage of the gross value of an invoice for a certain period of time (e.g. 1.59% for 90 days).

Automated Clearing House (ACH): An electronic payment sent directly from one account to another. An ACH usually has fewer fees associated with it since it bypasses card networks.

Insolvency: The inability to pay debts upon the date when they become due in the ordinary course of business.

Recourse Period: the time that a factoring company allows for the customer to pay an open invoice that the factor has funded.

 


About Fees

The correct term for factoring fees is “discount rate”. It may also be referred to as a “factoring rate”. However, because “factoring fee” is widely recognized as the common phrase, it is a term that will be referenced throughout this publication.

A factoring fee is not an interest rate for borrowing money, but rather a service charge for financing an invoice. The factoring fee is paid to cover more than just interest on capital. Included with the fee is due diligence by the factoring company on the trucking company’s debtors, verification of invoices and the disbursement of advances and reserves. Additional fees may also be associated with the factoring of invoices, depending on the invoice factoring company chosen.
 

Determining the Factoring Fee

Having a good understanding of these costs will better prepare you to select the best transportation factoring company to work with.

Factoring companies take several essential considerations into account when determining the factoring rate to charge a company in exchange for its accounts receivables. There are numerous factoring companies serving a multitude of industries, therefore an array of rates and fees exist that can be difficult to analyze. Having a good understanding of these costs will better prepare you to select the best transportation factoring company to work with.

Typically, the factoring fee is deducted either from the advance or from the reserve. The rate paid by the client is determined by a number of aspects. The most important business characteristics that will affect the rate are:

  • Type of Industry
  • Debtor (Customer) Credit Status
  • Invoice Volume and Number of Customers
  • Day Sales Outstanding (DSO)


Figure 2-1:  How the Factoring Fee is Determined



Type of Industry

Certain industries are considered more unstable and risky than others. Trucking companies are typically assigned higher financing rates as the transportation industry is considered to be volatile business by conventional lenders. This can be mitigated by working with a factoring company that understands trucking well.

Look for:a factoring company that specializes in trucking to ensure the lowest factoring fees for your trucking company.

Customer Credit Status

The cost of factoring is very dependent on how creditworthy and stable a client’s customers are.

If a trucking company has credit worthy customers they are the ideal candidate for a factoring company. The cost of factoring is very dependent on how creditworthy and stable a client’s customers are. By hauling for reliable and creditworthy customers, a trucking company can be in a strong position to qualify for low rates. On the other hand, if working with customers who are not as stable, such as start-ups or customers with weak credit histories, factoring fees will be higher.

Look for a factoring company that will complete a credit audit of a customer base prior to committing to a factoring rate. This process will ensure that a firm rate will be established without encumbrance or credit restrictions. In many instances, trucking companies find themselves in a new relationship with a factoring company that introduces additional hidden fees and or credit limits due to the credit status of a client’s customers. Be sure to establish up front what customer invoices are pre-approved for funding and which, if any, are not.


Invoice Volume and Number of Customers

The less concentrated the customer base, the lower the factoring fee.

Size does matter! Trucking companies that regularly processes a high volume of invoices will qualify for lower rates. This is because the factoring company can concentrate back office resources more efficiently with less administrative work to direct funds.

Additionally, the larger the customer base, the more stable the revenue stream. Trucking companies with one or two customers only are considered to be high concentration and are more susceptible to risk. Lose the customer and you lose your business. Lenders, including factoring companies, are adverse to risk. Therefore the less concentrated the customer base, the lower the factoring fee.


Day Sales Outstanding

If a customer base has a relatively short DSO, factoring companies will offer lower factoring fees.

Accounts Receivable Turnover, or more correctly known as Days Sales Outstanding (DSO), is a measure of the average payment days of a client’s customers. The quicker customers pay their invoices, the more valuable they are. Therefore, if a customer base has a relatively short DSO (less than 40 days), factoring companies will offer lower factoring fees.

Learn how to calculate the DSO of your customers.


 

Common Factoring Fee Structures for Trucking

Depending on the industries they serve and the customer needs they are focused on, Invoice Factoring Companies provide differing fee structures. Typically, factoring fees are arranged in one of four different ways:

  • Tiered
  • Daily
  • Prime Plus
  • Flat Fee

Tiered Factoring Fee

A tiered factoring fee is typically accrued in tiers of 10 or 15 days, although it may be calculated on a monthly, weekly, or daily schedule.

A standard tiered factoring fee arrangement looks something like this:

  • Invoice value: $1,000.00
  • Advance rate: 95% ($950.00)
  • Factoring fee: 1.5% for 15 days
         - plus an additional 1.0% each time the unpaid invoice passes 15 days
  • Fee schedule:


In the above example, the trucking company would pay only $15.00 if their customer pays the invoice within the first 15 days. However, most of the time invoices are paid in greater than 30 days. If your customer pays in 31 days, the factoring fee would be $35.00.


Daily Factoring Fee

A daily factoring fee is calculated each and every day the invoice is outstanding.

A standard daily factoring fee arrangement looks like this:

  • Invoice value: $1,000.00
  • Advance rate: 95% ($950.00)
  • Factoring fee: 0.10% per day
  • Fee calculations if invoice is paid on day:


In the above example, the trucking company would pay only $15.00 if their customer pays the invoice in 15 days. If a customer pays in 31 days, the factoring fee would be $31.00.


Prime Plus

A Prime plus factoring fee is calculated each and every day an invoice is outstanding. The rate is the current prime lending rate plus a per annum rate calculated daily. A standard rate that could be offered is “prime + 3.5%.” If the current prime rate is 4%, the rate would be 7.5% per year.

Selling an invoice at a rate of prime + 3.5%, the fee would look like this:

  • Invoice value: $1,000.00
  • Advance rate: 95% ($950.00)
  • Factoring fee: Prime + 3.5% (total 7.5%, or 0.02055% per day)
  • Fee schedule:
 


Similar to an installment loan, interest is accrued every day until the loan is repaid. The earlier the customer pays, the cheaper the factoring fee.


Flat Fee

Flat fee factoring is the preferred choice by many owners of trucking companies.

The easiest fee to calculate and usually the most cost effective is Flat Fee Factoring. The fee is a percentage of the invoice, a one-time cost for a set period of time; usually 60 or 90 days. No matter when the customer pays their invoice within the set time period, the fee will be the same.

A flat fee on a $1,000 invoice looks like this:

  • Invoice value: $1,000
  • Advance rate: 97% ($970.00)
  • Factoring fee: starting from 1.59% ALL-IN for 90 days
  • Fee schedule:


Flat fee factoring is commonly available to Transportation Companies and is the preferred choice by many owners of Trucking Companies.
 


Which Structure is Best for Your Trucking Company?

The industry favorite among many Trucking Company owners is Flat Fee factoring. The simple to calculate fee and the low rate is the ideal cash flow solution for busy trucking companies on the move.  

Look for:freight factoring companies that offer flat fee factoring featuring a one time ALL-IN cost for 90 days.
  

Additional Freight Factoring Fees

Hidden Fees to Watch Out For

Depending on the factoring company chosen to work with, additional fees may be charged above and beyond the expected. Take particular notice of this issue as it one of the main causes of soured relationships between a trucking company and their new factoring company.

No two factoring companies are the same, nor are their pricing structures. Where some are upfront in disclosing all fees, others are less forthright. Unfortunately, there are some factoring companies that reveal hidden fees once a client has committed to an agreement and begin the funding process. These are the factoring companies to look out for and avoid like the plague.

Look for:a factoring company that has an all-encompassing fee and discloses any and all additional costs that may affect your account.

Following are common additional charges:

  • Application and Startup Fees
  • Servicing Fee
  • Invoice Processing Fees
  • ACH and/or Bank Wire Fees
  • Monthly Minimum Fees
  • Early Termination Fee

 

Figure 2-2:  Common Additional Charges


Application and Startup Fees

It takes time and effort for a factoring company to set up a new client. Due diligence must be conducted and legal documents must be brought into place. To offset this initial investment, many factoring companies pass the cost onto their new client.

Some factors charge fees to cover the cost of evaluating an application and/or setting up the financial arrangement. Many of these factors will hide this cost until the first invoice is factored.

Look for:a freight factoring company that does not charge an application or set-up fee.

Servicing Fees

Servicing fees are usually charged on a monthly basis, but could be charged at other intervals as well. These are usually general fees used to cover the costs associated with keeping an account current, providing reports, etc. This fee is sometimes called an Administration or Maintenance Fee.


Invoice Processing Fees

This fee is used to cover the costs incurred while processing invoices. Such costs could be as a result of running credit checks or maintaining records.


ACH and/or Bank Wire Fees

Factors may charge a small fee to transfer funds between banks. There are a few different ways to transfer funds, including Automated Clearing House (ACH) and bank wire. A bank wire is often faster but more expensive. Therefore, it is more likely to come across a bank wire fee than an ACH fee, but some factors charge for both.


Monthly Minimums

Some factors may require that a client factors a certain amount if invoices per month. If the client dosen't meet that minimum, they will charge a monthly minimum fee to make up th.


Early Termination Fee

If the factoring company requires a contract, it typically ranges from 6-18 months. If for any reason the client wants to cancel the arrangement, they will almost always have to pay a fee to get out of the contract.



Are Extra Fees Bad?

As long as the factor is upfront about extra fees, they are not necessarily a bad thing. Regardless of the way they are charged, the client will have to pay for services such as account maintenance, invoice processing, and money transfers; instead of charging additional fees, some factors may simply roll all these costs into the factoring fee.

Whether or not an arrangement with extra fees is best for the client's business must be evaluated on a case-by-case basis.

 


Summary: Understanding Factoring Fees for Trucking

Understanding the costs associated with factoring your freight bills is one of the main considerations to be weighed when choosing the best freight factoring company for your trucking business. Knowing how costs are determined, typical fee structures and being aware of all the possible hidden fees to be aware of is essential.

Following is a check list identifying the key information to be considered when researching the cost of factoring.

Check List

  • Does the factoring company provide a pricing structure that’s right for your business?
  • Does the factoring company disclose all of their additional fees?

 

Chapter 3

Speed of Funding with Freight Factoring

 

Typically, when a trucking company reaches the realization that it needs to secure financing, it often becomes an urgent issue that requires an immediate solution. Pay day is looming, taxes are due, a fuel bill hits your desk, or any number of other expenses with crucial due dates are pending. Perhaps you are maintaining positive cash flow and are keeping up with expenses, but there is no cash reserves left to support the operational costs to take on more business. You need a factoring company that will react quickly to get you qualified, on-boarded and begin funding to maintain, or better yet, expand operations.

Be cautious … not all factors can live up to the promise of same day funding.

When investigating a freight factoring company, make sure you understand how their process works and the time lines involved. Some factoring companies take weeks to complete their underwriting and to start 1st funding. Others will be able to manage the process from first contact to first funding in a matter of a few days. Equally important is the speed at which ongoing funding occurs; it is industry standard to advertise “Same Day Funding”. Be cautious when choosing the factoring company to work with, not all factors can live up to the promise of same day funding.

Learning Objectives

After reading this chapter, you should be able to:

  • Understand how to qualify for factoring
  • Identify the steps taken to carry out the funding process
  • Understand the value of online document management systems
  • Identify the internal policies that could slow funding
  • Gauge how quickly a factoring company will be able to provide funding
 
Definitions

Before reading this chapter, you should know the definitions of:

Factoring Agreement (Factoring Contract): A formal contract issued to the client that states the terms of the factoring agreement.

Same Day Funding: Getting funded on invoices that the factoring client submitted that same day.

Verification: The process of checking an invoice’s validity, amount, and payment address. This is usually done through a phone call with your customer.

 

Easy Qualification

Qualification for factoring is much, much simpler than applying for a traditional bank loan. Since it is based on the creditworthiness of the client’s customers, not on the client’s own personal or company worth, it is far easier and quicker to attain.

Some factors require lots of paperwork and lots of time to complete due diligence. Others have better systems and procedures in place to streamline the process reducing the time to complete.

Look for:a factoring company that requires minimal credentials in the application process and has the infrastructure to process credit searches, UCC filings, and legal documents quickly and easily.

A good factoring company will have a simple online form to get started and be able to process an application and approve funding in just two days once the client provides:

  • Copy of Articles of Incorporation
  • Two pieces of ID including Driver's License
  • Carrier Package

 

Steps to First Funding

A soon as a client is qualified, funding can begin. The following is a step-by-step guide from application to first funding.
 

  1. Notifying the client’s customers of the factoring arrangements. Once a client starts factoring, they will need to notify their customers of the invoice assignment and that all payments need to go to the factoring company.
  2. Invoicing and documentation submission. Once the customer has been invoiced, a copy of the invoice, rate confirmation and bill of lading should be sent to the factoring company.
  3. Invoice Verification. Before the factoring company can provide funding on a submitted invoice, they need to verify that the load has been delivered. A good factoring company will do this in a professional manner, protecting the integrity of the client and expediting the verification process.
  4. Receive funding on approved invoices. Once the factoring company approves an invoice, the funds will be advanced to the client’s bank account. The advance rates associated with Freight Factoring are typically high, usually ranging from 90% to 100% of the value of the invoice. This amount is usually deposited the same day as the invoice is verified.
  5. Final Remittance. Once the invoice is paid by the customer, the factoring company will release any amounts due to the client on the invoice.
  6. Deliver/Invoice/Repeat. the process (steps 2-5) repeats with each invoice that is submitted to the factoring company.
     
     

Figure 3.1:  The Process for 1st Funding

Same Day Funding

A good factoring company should understand their client’s need for continuous and dependable cash flow. As such a trucking company should choose a factoring company that recognizes the capital intense nature of the trucking industry and provides quick access to funds through same day funding.

The average trucking company generates and submits multiple invoices every day for funding. Each of these invoices needs to be verified. Any discrepancies or disputes must be dealt with prior to funding.

Look for:a freight factoring company that assigns a dedicated account team to service the client.

Any issue that threatens delayed payment should be dealt with professionally and quickly to mitigate interruption and maintain reliable access to funds as expected.
 

Ease of Document Submission

The submission of support documentation to verify delivery and rate of any given load is a requirement shared by all Factoring Companies prior to releasing funds. The required documents typically include:

  • Bill of Lading
  • Rate Confirmation
  • Copy of Invoice

Thankfully, online document management systems have become a standard feature of most invoice factoring companies that specialize in the trucking industry. Submitting documents online eliminates the need to provide original documents and creates a more convenient experience for the client. A factoring company with these systems in place can quickly acquire and verify documents without inconveniencing the trucking company or its drivers. It also allows for expedited verification and same day funding. However, not all factoring companies are the same and some use less efficient systems to manage document submission.

Things to be Aware of:

Some factoring companies will delay funding to the trucking company by claiming the documentation is unreadable, inaccurate or otherwise unsuitable for verification purposes. Although these issues are valid concerns that must be addressed, it is the speed of resolution allowing funding to continue that is most important.

Look for:a factoring company that provides online document management systems and dedicated customer service with trucking related experience to complete funding in the most expedient fashion.

Internal Policies that Could Slow Funding

A factoring company that specializes in trucking should be focused on speed of funding to meet the capital expense needs of a fleet operation. However, the client’s ability to quickly create and provide clean and accurate documentation is critical to this process. Difficult to read or inaccurate documentation (bill of lading, rate confirmation, copy of invoice) will impede the timely management of funding. Therefore it is in the best interest of the client and the factor to make sure that all documents are in proper order to expedite funding. Ensure the factoring company chosen to work with has a simple to use electronic document submission platform to simplify this procedure and a dedicated back office committed to expedite the administration.

Some factoring companies actually look for any discrepancies in the documentation to delay the funding process.
 

One thing to watch out for are tiered factoring contracts where the rate goes up after a set number of days. In these cases, some factoring companies actually look for any discrepancies in the documentation to delay the process. After all, the longer the process takes the later the invoice is paid and therefore the more fees the client pays to the factoring company. Always make sure that a factoring company is honest and willing to work with a client to solve any issues as soon as they arise.
 

Verification of Invoices

Some factoring companies will verify every invoice issued. This can create a disruption for customers’ accounting departments and can affect the client’s relationship with them. An experienced freight factoring company has the capability and systems in place to avoid this potential difficulty. Utilizing industry knowledge and fortified with reliable credit information, a qualified factoring company will implement a sampling approach to verify invoices. This tactic reduces the risk mitigating process to a comfortable level that customers will appreciate.

An experienced factoring company will form a mutually beneficial working relationship with a client's customers.

The verification process is tailored to seamlessly integrate with the existing systems and work practices as established by customers’ accounts payable department. This approach creates an environment of enhanced credit protection with minimal disruption to the customer.


Figure 3-2: The Verification Process

 

How Factoring Companies Manage Freight Bill Disputes

Until such time as the dispute is resolved, the invoices will remain ineligible for funding.
 

On occasion, customers will dispute their invoices based on some level of dissatisfaction with the freight service or inaccuracy of the invoice. Ensure the factoring company you work with is dedicated to facilitating quick resolution with prompt reporting of any such issues. The report should record invoice details and identify the reason as to why payment is being withheld. With this information, the trucking company can take affirmative action to resolve the issue and remove the dispute. Until such time as the dispute is resolved, the invoice will remain ineligible for funding.
 


Figure 3-3: The Dispute Resolution Process

 

Summary: Speed of Funding for Trucking Companies

When trucking companies realize the need to secure funding for operational support and fuel growth, it is often an urgent issue that requires an immediate solution. Freight factoring is designed specifically for trucking companies. The speed of which the qualification process, ongoing funding and the efficient management of disputed invoices occurs is significantly important to providing financial certainty and enhancing the success of your business.

The following check list identifies the key points to be considered when assessing a freight factoring company’s ability to provide fast, reliable funding.

Check List

  • Does the factoring company have quick and simple to use systems for document submission to ensure you are paid quickly and conveniently?
  • Does the factoring company provide dedicated customer service with trucking related experience to complete funding in the most expedited fashion?
  • Does the factoring company provide same day funding?
  • Does the rate for factoring go up after a set time period? Some factoring companies may wait till after the set period to solve any issues, making you pay more.
  • Does the factoring company react proactively to help resolve disputes by providing prompt reports detailing service issues and reason why payment is being withheld?
 



Chapter 4

Great Customer Service with Freight Factoring

Once a client has begun funding with a freight factoring company, a steady stream of information starts to flow between the client, the factoring company and the customers. Managing this informational flow and directing the funding process involves the constant administration of verifiable data and effective dispute resolution when issues arise. The factoring company you choose to work with needs to be well attuned to trucking industry issues and potential problems that can affect funding. Dedication to fulfilling the funding obligation to the client reliably and conveniently is the hallmark of a reputable lender and a principle policy of the best factoring companies.

The factoring company needs to be well attuned to trucking industry issues and potential problems that can affect your funding
Learning Objectives

After reading this chapter, you should be able to:

  • Understand the value of industry experience when choosing a factoring company
  • Recognize the value of dedicated accounts managers when choosing a factoring company
  • Understand the value of credit analysis tools provided by a factoring company
  • Recognize the value of a factoring company that is willing to work with you not against you
  • Better identify which factoring company can provide a superior level of customer service for your business
Definitions

Before reading this chapter, you should know the definitions of:

Day Sales Outstanding (DSO): A calculation used by a company to estimate the average time it takes their customers to pay..

Dedicated Account Manager: A client’s main contact with a factoring company and the manager of a client’s factoring account. A dedicated account manager is used by a factoring company in order to build a relationship with the client to better understand their needs.

 

Does Your Factoring Company Understand Trucking?

One of the first steps when looking for a factoring company, and possibly one of the most important, is to find a factor that specializes in your industry. The unique and highly demanding nature of the trucking industry requires factoring companies to have experienced and knowledgeable staff to navigate potential issues and offer assistance when times get rough. It is important to choose a factoring company that understands the trucking industry without the client having to explain their business. The best freight factoring companies go one step further by providing additional resources such as helpful blog articles with information to assist your efforts as a business owner. Identifying metrics, such as key performance indicators, to monitor progress towards your strategic goals is just one such example.

Look for:a factoring company that specializes in trucking.

A good factoring company should improve collections while decreasing their clients overhead costs. Ongoing credit analysis of customers, reporting and cost effective accounts receivable management are just a few of the advantages that a trucking industry specific factoring company offers.

Not only will they have the resources to best meet their client’s needs, specialized transportation factoring companies will provide a selection of specific services designed for carriers. The best freight factoring companies will offer, not only specialized factoring services, but further value added services to increase cost savings. A robust Fuel Discount program is the ideal supplementary service offered by a few industry experienced factoring companies (see page xx for more information). If the factoring company you are researching does not provide value added services, perhaps it’s time to investigate further options.
 

 

How to Recognize a Trusted Factoring Company

It is critically important to find a “good fit” when looking for a factoring company. Factoring is an excellent option for a trucking business, but only if they have chosen a factor that works well with both their own organization and their customers. It is essential to work with a factoring company that protects a trucking company's relationship and interacts well with their customers. Use the following check list to ensure you choose the right factoring company for a trucking business:

Integrity

  • Does the factoring company provide full transparency with online accounting and regular reports?
  • Is the fee structure easy to understand and simple to calculate?
  • Ensure there are no hidden fees or surprises.
  • Ensure there are no delays in the funding process.
 

Reputation

  • Check the factoring company's website for testimonials and case studies
  • Ask the factoring company for references. Speak to their existing customers (your fellow truckers) and ask about their level of satisfaction.
 

Superior Customer Service

  • Does the factoring company provide a dedicated accounts manager?
  • Is their customer support service prompt and helpful?
  • Does the factoring company communicate with a client’s customers in a courteous and professional manner?
 

Experience

  • Does the factoring company truly understand trucking…not just from a lenders perspective, but from actual hands on experience?
 

Dedicated Account Manager

Having a dedicated account manager is critical when choosing a factoring company. A dedicated account manager ensures superior and consistent customer service. A professional account manager will give trusted advice to help with credit decisions, expedite funding, and answer all queries. Without a dedicated account manager, companies lack a consistent point of contact with their factor. This can lead to confusion among both parties if something goes wrong. A dedicated account manager allows for a relationship to be built in which the accounts manager can better assist the client since they understand the specific needs of their client’s business.

 

How Factoring Companies Perform Credit Analysis

Factoring companies will not automatically pay invoices from a client’s customers without first conducting a credit check. They will want to gain confidence that a client’s customers are creditworthy and likely to pay. Most transportation factoring companies will request a list of current customers and conduct a credit check prior to signing a factoring agreement. This benefits both the client and the factoring company. Knowing upfront which customers are creditworthy and which are not will eliminate the problem of hauling for a shipper who’s invoices cannot be funded.

A client should know upfront which of their customers’ invoices are preapproved for funding.

Some factoring services will not share this information prior to formalizing a relationship. In an effort to secure a client’s business, they may hold back in revealing which customers they will not buy invoices from. In these circumstances, the client may discover too late that a portion of their customer base is not approved for funding thereby severely restricting their access to funds. A client should know up front which of their customers’ invoices are preapproved for funding.

The best factoring companies will provide additional credit support and a convenient online tool to assist their clients identify creditworthy customers.

Look for:a factoring company that provides a free online credit tool to conduct unlimited credit searches on potential new customers.

This is a useful feature to protect trucking companies by identifying a prospective customer’s credit prior to booking a load. For further assistance, a professional factoring company should have knowledgeable staff that can assist with credit information when needed.

Figure 4-1: Example of free credit information provided online by some factoring companies  

Is Your Factoring Company Flexible in Difficult Times

Dedicated Account Managers and regular credit checks are two great qualities to find in a factor; however, one thing that truly sets factoring companies apart is their ability to be flexible.

In a perfect world, there would never be problems within a client’s company or their customer base; however, that is often not the case. Even the best of businesses run into issues from time to time. When financial difficulties arise, a good factoring company will work with their client to overcome critical expenses that are due and develop a suitable arrangement to repay.


Summary: Great Customer Service with Freight Factoring

Great customer service from your freight factoring company is measured not just by the speed and reliability of funding, but by much more. In order to respond quickly and supportively during financial emergencies, the factoring company needs a full understanding of the trucking industry. The factoring company’s staff must have industry experience in both trucking and finances to ensure quality service. The ability to provide helpful advice and information, such as how to calculate cost-per-mile, is a sure sign of an industry experienced factoring company. Integrity and reputation are equally important as you need to have a trusted financial partner you can count on to manage your cash flow through varying conditions and circumstance.

The following checklist identifies the considerations to be researched regarding customer service when choosing the best freight factoring company to manage your trucking company’s cash flow.

Check List

  • Does the factoring company understand and have experience in the trucking industry?
  • Does the factoring company offer online systems that allow their client to track customer payments in real-time, submit invoices, review Days Sales Outstanding (DSO) and customer (broker) credit information?
  • Does the factoring company provide full transparency with online accounting and regular reports?
  • Is the fee structure easy to understand and simple to calculate?
  • Ensure there are no hidden fees or surprises.
  • Ensure there are no delays in the funding process.
  • Does the factoring company's website have good reviews, testimonials and case studies?
  • Ask the factoring company for references. Speak to their existing customers (your fellow truckers) and ask about their level of satisfaction.
  • Does the factoring company provide a dedicated account manager?
  • Is their customer support service prompt and helpful?
  • Does the factoring company communicate with their client customers in a courteous and professional manner?
 
 

Chapter 5

Understanding a Freight Factoring Agreement

Once you have narrowed your search for a freight factoring company to partner with, it’s time to assess the factoring agreement that will bind your commitment to your lender. It is vital to thoroughly understand the terms of the contract and how the relationship with your factoring provider will impact your business.

Prior to signing any agreement with a factor, ensure the factoring company has revealed the credit limits that will govern your account.

If the factoring agreement you are reviewing is exceedingly wordy, confusing and uses jumbled legal jargon, it may be a sign that the factor is hiding something in the dense legal language. A factoring agreement should clearly outline the roles, responsibilities, terms and all costs associated with factoring invoices. Prior to signing any agreement with a factor, ensure the factoring company has revealed the credit limits that will govern your account.

If you don’t understand how everything works, it is best to ask for clarity. How the factoring company handles this stage of the new relationship is a good indicator of how they will handle your business. If the factoring company’s representative does not know the answers to your questions, or is delayed in responding to your correspondence, it is an indication that your business will be managed in a similar fashion.

Learning Objectives

After reading this chapter, you should be able to:

  • Know what to look for in a factoring agreement.
  • Understand the difference between the advance and the reserve.
  • Understand things to avoid when signing a factoring contract.
  • Understand exactly what you are getting before you sign a factoring contract.
Definitions

Before reading this chapter, you should know the definitions of:

Advance: The first installment of funding paid to the Trucking Company when the Customer is invoiced. It is based on a percentage of the invoice face value.

Reserve: The second installment of funding paid to the Trucking Company when the Customer pays the invoice in full. It is based on the remaining percentage of the invoice face value after the Advance is paid.

 

Know What to Look For in a Factoring Agreement

When assessing a factoring agreement, the client should make sure they have a clear set of priorities that define their cash flow needs. Most business owners are trying to establish three facts up front:

  • How much of the Advance is received upfront?
  • What is the cost
  • How fast will funding transactions take place


In addition to these vital issues, the factoring agreement should clearly define all the contractual terms. Here’s what to look for in a Factoring Agreement:

  • How to leave a Factoring Company
    • `Notice of Termination / Early Termination
  • Monthly Minimums
  • All costs
  • Assignments
  • Credit Limits


Two Parts of a Freight Factoring Transaction

Invoice Factoring is structured much differently than traditional forms of business financing. Its purpose is to provide an easy funding solution to companies based on the credit strength of the trucking company’s customer base. As with most lenders, the Factor will seek to gain protection against payment default. This is normally achieved by means of breaking the invoice financing transaction into two amounts; the “Advance” and the “Reserve”.

The Advance

The advance is the first installment of funding paid to the trucking company when the customer is invoiced. It is based on a percentage of the invoice face value.

The higher the advance, the more working capital is made immediately available.

In the trucking industry, the advance generally ranges from 85% to 95% of the face value of the invoice being factored. In cases where the factoring company specializes in trucking, the Advance is usually higher and may be as much as 100%. For this reason alone, it is recommended to utilize the financial services of a trucking specialist factoring company. The higher the advance, the more working capital is made immediately available to support ongoing operational costs.
 

A specialized factoring company for trucking ensures a greater amount of advanced funding.

The Reserve

The reserve is the second installment of funding paid to the trucking company when the customer pays the invoice in full. It is based on the remaining percentage of the invoice face value after the advance is paid.

The purpose of the reserve is to provide the factor and the trucking company with a cushion should the customer fail to pay an invoice. Should an invoice go into recourse (non-payment within a set number of days) the trucking company is obligated to buy back the invoice (see Recourse Factoring). Should the trucking company fail to meet this obligation, the factoring company enacts the reserve. The combined reserves from the multiple invoices being factored by any one trucking company acts as a buffer that can be drawn against to compensate for payment defaults.

It is important to realize that measures used to protect against payment default varies widely from one factoring company to another. For highly specialized factoring companies that serve the trucking industry, the risk aspect is mitigated by intimate industry knowledge and accurate credit analyses of the company’s customer base. By collecting and maintaining current data on thousands of debtors, these specialized factoring companies are able to instantly assess credit risk and efficiently implement risk management measures without the need to impose large reserves against the transaction. Utilizing the services of a specialized factoring company for the trucking industry ensures a greater amount of advanced funding.


Length of Contract for Freight Factoring

What is the Industry Standard

A factoring contract is in place to protect both the factoring company and the trucking company by defining the terms of the relationship. It is equally important for both parties to be able to depend on the other’s continued business. A trucking company needs to rely on continued funding from its lender; otherwise it becomes financially vulnerable should the factoring company choose to cease funding. A signed contract protects the trucking company from this vulnerability.

Avoid factoring agreements that lock you into multi-year terms.

Contracts with one year terms are considered industry standard and are to be expected. Avoid at all costs any factoring agreement that locks clients into multi-year terms and or has undefined termination penalties. The purpose of the contract is to establish stability, not intentionally lock one of the parties into a long and arduous relationship.

Look for:a factoring agreement that has no longer than a 12 month term and defines a clear set of conditions for early termination.

If a factoring company is chosen carefully, a trucking business should benefit greatly from the relationship. If, however a client is dissatisfied for any reason, they need the ability to end the relationship without undue adversity.


How to Leave Your Factoring Company

The most important clauses in the contract define how to leave your factoring company.

Should a trucking company determine that services provided by the factor are unsatisfactory for any reason; the trucking company needs to have the choice to opt-out. Perhaps the two most important clauses in the contract for trucking companies are the clauses that define how to leave a factoring company.

Notice of Termination: In the factoring industry, almost all factoring agreements are subject to a Notice of Termination to end the contract. If the agreement is industry standard and subject to a 12 month term, then the expected Notice of Termination is 60 to 90 days in writing. There are no penalties to ending the contract in this fashion. If the factoring company does not receive notice, the contract is usually reinstated for another full term.

Early Termination: Ensure the contract contains an early termination policy; otherwise the client will be locked in for the full contract length. When reviewing this clause, it is important to understand how much it will cost to end the contract prior to its full term. Take extreme caution when evaluating this policy. Some factoring companies structure the early termination fees to be excessively high and thereby trap the trucking company with prohibitive penalties. To further add restrictive measures to keep the trucking company engaged, some factoring companies demand a long notification period during which time no funding is available. This is a dangerous trap that binds the hands of the trucking company by effectively ending all funding for months at a time.

Look for:a factoring company that provides the option to terminate the agreement easily by written notification with a nominal early termination fee.

Generally, the early termination fee is based on a percentage of the maximum credit limit associated with the account.


How Freight Factoring Companies Set Credit Limits

Identify any of your customers that are deemed “untouchable”

A factoring company will set credit limits based on the credit worthiness of a client’s customer base. It may seem to be an obvious stage, but ensure the factoring company has completed their due diligence prior to the presentation of a factoring agreement. Only by fully vetting a client’s customer base will a factoring company be able to set credit limits. Once set, have the factoring company detail the credit available by stating the maximum funding available and by identifying any of the customers that are deemed “untouchable” (not credit worthy). Knowing this ahead of time will eliminate any unexpected denial of funding due to credit issues.
 

Freight Factoring: Monthly Minimums

Are Minimums Required?

Factoring is a labor-intensive industry with large carrying costs. In order to operate profitably, the factor calculates each trucking company client’s expected sales volume to determine rate thereby generating profitable revenue. This is common practice which almost all factoring companies adhere to. However, the terms of contracts that support this principle is where factoring companies can differ greatly. A majority of factoring companies require a minimum of sales volume from their clients to ensure each relationship is profitable. This creates a strain on the trucking company to meet the monthly quotas set by their financial partner. As seasonal fluctuations occur and economic conditions change, trucking companies can struggle to meet these targets. This in effect negates the convenience and ease of use that freight factoring should provide.

Look for:a factoring company that does not require factoring a specified amount of invoices every month.

Sneaky UCC Filings

Beware of Unscrupulous Freight Factoring Companies

Less than forthright factoring companies are known to file a UCC-1 as soon as you apply.

Prior to entering into a binding agreement, a factoring company will file a Uniform Commercial Code (UCC-1) to secure their interest in a trucking company. This is standard practice with all Lenders and requires a client’s permission to be executed. However, that being said, less than forthright factoring companies are known to file a UCC-1 as soon as a company applies for factoring. The sole purpose for this unscrupulous activity is to make it difficult for trucking companies to go with another factoring company.

They manage this by finding creative ways to have clients sign off prior to actually signing a factoring agreement. For instance, it may be in the wording of the application form that is submitted when first seeking information from the factoring company.

Look for:Look for:a factoring company that waits until you have an agreement in principle prior to filing a UCC-1.

Summary: Understanding a Freight Factoring Agreement

Before finalizing a contract with a freight factoring company, be sure to read the factoring agreement carefully. Understanding the details of the agreement is vital as it governs how the relationship with your factoring partner will impact your trucking business.

Follow the check list below prior to signing an agreement:

Check List

  • Does the factoring company offer the advance and reserve at a competitive rate?
  • Does the factoring company have termination clauses that make it difficult to stop factoring?
  • Does the factoring company require monthly minimums 
  • Does the factoring company identify credit limits before you sign the factoring agreement?
  • Does the factoring company wait until you have an agreement in principle prior to filing a UCC-1?

Copyright 2018, Accutrac Capital Solutions Inc.