Factoring 101: Good vs. Problematic Freight Factoring Practices
by Apex Capital | July 11, 2013
It’s hard to know who you can rely on these days. However, when it comes to factoring freight bills there are a few simple things that you should pay attention to in order to avoid falling into a factoring pitfall.
Good factors charge competitive rates, but usually not rates so low that lead you to believe you are paying practically nothing. That’s because a good factoring company makes its money from healthy business with its clients rather than hitting struggling companies with steep fees and penalties that run them out of business. Just because a factoring company offers you an extremely low rate does not mean they won’t add other fees in or be a good business partner.
A good factoring company is unlikely to require a long-term contract right away, though there are many conditions where long-term contracts are a good thing. If someone pressures you into a long-term contract or says he won’t do business with you at all without signing a long-term contract, be wary. If you are unhappy with the service a few months into the relationship, you are likely to be stuck until the contract expires – unless you pay large penalty fees. Depending on the contract, if you don’t live up to the terms of the contract the factor could legally take money from your checking account or seize your property.
Trucking companies want to take the best, highest-paying loads possible. However, it’s hard to predict which potential clients will pay on time and which will be professional. A good factoring company can give you a quick, reliable credit check of the broker, shippers or freight forwarders you are thinking of hauling freight for. If the factor seems too small or too inexperienced to have a reliable credit department, be cautious.
Monthly minimum volume fees
Just like with long-term contracts, a professional factoring company is unlikely to require minimum monthly volume fees. Good factors have lots of clients and do not need to nickel and dime you to ensure they make a profit. And just like in any business, unexpected problems happen in trucking. You may find that you have a bad month and can’t meet the minimum volume. A good factor won’t cut you off or charge you penalties just because you’re going through a rough patch.
Professional factoring companies with strong credit departments are able to offer non-recourse factoring services because they understand the risks of the business. However, many companies claim to offer this service, but when one of your invoices doesn’t pay, you still get charged. Good factors will answer all of your questions about the terms of a non-recourse agreement. They will also explain the conditions which would lead to you having to cover the cost of an unpaid invoice.
The best factors are upfront about the charges they have. And what a salesperson says to you on the phone will be the same thing that appears in your written agreement. Make sure you ask as many questions as possible, read all fine print and – if possible – have a lawyer look over your factoring agreement. Some factors can have fees you never anticipated because the terms weren’t clear from the start.