In trucking, ensuring steady cash flow is crucial for staying on the road hauling loads, and keeping your trucking company successfully growing. Enter factoring agreements, a strategic business relationship that helps maintain healthy cash flow. But what is a factoring agreement, and how can it benefit your trucking company?
What is a Factoring Agreement?
A factoring agreement is a contract in which a trucking company sells its accounts receivable, or outstanding invoices, to a factoring company for a fee. Factoring provides quick cash for hauling loads, eliminates the wait of months to get paid by a broker or shipper, and brings in steady cash flow. Factoring for trucking companies can also supply funds needed for fuel, maintenance, insurance, and payroll.
Key Components of a Factoring Agreement
Understanding the components of a factoring agreement is essential for trucking companies considering this financial solution. Here are the primary elements:
- Advance Rate: The advance rate is the percentage of the invoice’s value that the factoring company will pay upfront to the trucking business. Typically, this ranges between 80-90%.
- Reserve Amount: The dollar amount the factoring company holds until the invoice is paid in full. This can offset losses from potential payment issues. The reserve, minus applicable fees, gets released to the trucking company after the invoice is paid.
- Factoring Fees: Factoring companies charge fees for their services, which can include discount fees, weekly fees, and others. Discount fees are typically a percentage of the invoice amount and can vary based on the risks of the invoices and the industry. Understanding these fees upfront can determine the cost-effectiveness of factoring.
- Eligible Accounts: Factoring companies typically determine eligible invoices and customers, including the creditworthiness of your customers and the terms of your invoices. Review these criteria to ensure your invoices meet the requirements.
- Term and Termination: Factoring agreements have specified terms, including the length of the agreement and the notification period required to terminate the contract. Understand these terms so your trucking company can plan accordingly and avoid potential penalties or cash flow disruptions.
More to Know About Factoring Agreements
Besides the key components, these provisions are also vital in a factoring agreement:
- Notice of Assignment: A notice of assignment is a legal document that informs a trucking company’s customers that their invoices have been sold to a factor. This notice directs customers to remit payment to the factoring company.
- UCC Filing: Uniform Commercial Code (UCC) filings secure the interest of factoring companies in the invoices. Different factors have varying practices regarding UCC filings. At Apex, we file UCC liens only on accounts receivable instead of the standard all-assets liens so, the only asset securing your cash flow is your trucking company’s accounts receivable. We buy your freight bills, so we only expect to get payments from your customers, not from your other personal assets, like equipment or property!
Evaluating Factoring Companies
Selecting the right factoring company is crucial for a successful factoring experience. Here are some key considerations:
- Compare Fees and Advance Rates: Look at the total cost of factoring, including all fees, and compare advance rates to ensure you get the best deal.
- Industry Compatibility: Ensure the factoring company understands the trucking industry and can handle your invoice volumes and customer credit profiles.
- Reputation and Financial Strength: Review the factoring company’s reputation, financial health, and customer service to ensure they are a reliable partner.
Factoring with Apex Capital
At Apex, we offer five-star factoring for our trucking clients. We provide fast-payment solutions that fund our clients on the same day or the next day. 24/7 Factoring can get you paid anytime, anywhere through our blynk® digital payment system on nights, weekends, and bank holidays. Plus, all our factoring clients enjoy the signature 5-star Apex experience:
- Transparent factoring agreement
- FREE unlimited broker credit checks
- FREE online Account Management Portal (AMP) with 24/7 access
- FREE Mobile Factoring® app with image-capture technology
- FREE fuel card with great discounts on fuel nationwide
- Fuel credit lines starting at $2,500 for qualifying clients
- An experienced account executive to help manage your account
Factoring agreements offer a lifeline for trucking companies, especially since waiting on long payment cycles can disrupt cash flow. Understanding the key components and provisions of a factoring agreement, as well as carefully evaluating potential factoring partners, means trucking businesses can effectively use factoring to promote growth.
Keeping your trucking company successful and your trucks on the road hauling loads is the end goal of factoring. The more you have a clear grasp of the pieces of a factoring agreement, the better equipped you are to make smart financial management decisions.
Are you unhappy with your current factoring company? Are you looking to switch? Apex can make your factoring company transition as painless as possible. Our comprehensive guide “How to Switch Factoring Companies” tells you everything you can expect in the process. Download it today!