Trucking companies need a strong, steady cash flow to stay ahead. It’s the key to being competitive, but it’s also difficult when the brokers and shippers you work with take a month or two to pay invoices.
Freight factoring is a helpful tool in getting paid the same day or within a few days of delivering a load, but it also comes with pitfalls. While there are plenty of reputable freight factoring companies, there are also scammers looking to prey on trucking company owners.
Saint John Capital is here to help you understand how some of these scams work and how you can choose the best freight factoring company for your business’s financial needs.
Understand the Basics of Freight Factoring
It’s easier to understand how scams work if you understand freight factoring as a whole. You’ve delivered a trailer full of merchandise for a client. With that bill of lading, your office workers use the information to generate an invoice, which is faxed, mailed, or emailed to your client. They now have Net30, Net60, or Net90 payment terms.
Until they pay you, you’re having to pay bills, fill trucks with diesel or gas, ensure maintenance happens, and keep up with wages, benefits, and other business expenses. It drains your savings. If that client goes bankrupt or closes the business before paying, you’re in financial trouble.
With freight factoring, the factor purchases your invoice at a discount. You get the money owed minus the freight factoring fee much faster, even the same day in some situations. Your factor invoices your client and waits for payment.
It’s advantageous as you gain a steady cash flow. Freight factoring with a reputable company also provides protection against unexpected bankruptcies or closures, depending on the agreement you make.
Learn How Freight Factoring Scams Operate
Unfortunately, where there’s money, there’s also a scammer waiting to grab it. Invoice factoring scams come in a variety of forms. The underlying goal is to get your hard-earned money. Here are the common types of scams in invoice factoring.
1. Contracts Are Confusing and There Are Hidden Fees
When a freight factoring agreement is legit, it’s going to be clearly laid out with fees made apparent. A scammer will use terminology that makes it hard to determine exactly what is and isn’t covered.
This often happens by making the contract far longer than necessary. People tire of reading dozens of pages and start skimming, missing pertinent details that would otherwise clue them into the scam’s hidden fees. Some of the most common fees are:
- Minimum volume fees: You’re charged if you don’t do enough work to generate the required number of invoices each month.
- Origination fees: You’re charged for each new account that’s set up.
- Processing fees: You’re charged a fee for each payment request to be processed, such as covering the cost of business credit checks after the first 20 each month.
- Exit or cancellation fees: If you want out of the contract, you have to pay a fee.
Sometimes, these fees are legitimate, but they’re not going to be excessively high. It’s one thing to have a $10 fee for each business credit check after exceeding 20 of them in one month, but it’s another if you’re charged $50 for every payment request you make each month.
Better is to find a freight factoring company like Saint John Capital where every business credit check is free. You get an unlimited amount with us.
2. False “Non-Recourse” Promises
Every freight factoring company offers recourse, non-recourse, or a hybrid arrangement. With a recourse arrangement, you must repay the money you were paid in advance if your client never pays. A non-recourse arrangement involves the freight factor taking the loss. A hybrid requires you to pay back a percentage, while the factor takes the remaining as a loss.
A true non-recourse arrangement offers exceptional protection against issues like sudden business closure or bankruptcy. However, some scammers make it sound like it’s a non-recourse when it’s not. Make very certain it is a true non-recourse freight factoring arrangement.
“Non-recourse” factoring means the factoring company takes on the risk if your client doesn’t pay. This sounds great, but some scammers will falsely advertise non-recourse terms by fine print that protects them by adding conditions where they will force you to repay the money.
3. High Application or Onboarding Fees
Many legitimate freight factoring companies exist, and they rarely charge an exorbitant application fee. Some scammers collect that fee and disappear. If you’re told you must pay a $1,000 application or onboarding fee to get started, be cautious.
When there is an application or onboarding fee, it should be clearly explained and reasonable. Better, find a company that doesn’t charge these fees until you’re approved. When you are charged a fee, it should be minimal and not eat into your profits.
4. Phishing and Identity Theft Scams
Phishing and identity theft are prevalent in all industries, including factoring. If you get a random email directing you to a website or a call asking you for your tax ID, bank details, and other private business information, it’s likely a scam. A reputable company isn’t going to reach out randomly.
Never open attachments without knowing they’re coming. Better is to have security software that can run protective scans of attachments in emails, as even a trusted sender may not be who you think it is. Too many scams involve spoofing a legitimate company’s email.
5. “Too Good to Be True” Offers
Many of the freight factoring scams you’ll encounter are offers that seem too good to be true. If a company offers you a 0.25% freight factoring rate when the competition is all quoting 3%, be cautious.
The low rate is often a trade-off for extremely high fees or restrictive terms. You’re paying a 0.25% freight factoring fee, but every payment you request has a $500 processing fee that you didn’t catch in the fine print. It’s deceitful and something you should avoid.
How to Protect Your Trucking Business from Scammers or Less Reputable Freight Factoring Terms
That’s how freight factoring scammers operate. How do you avoid falling for a scam?
1. Get and Compare Several Offers
Never go for the first offer. Reach out to five or six companies and compare the offers. If you don’t like any of them, add more. Look at the different offers and make sure that you’re looking for hidden fees and unreasonable requirements to narrow down your finalists.
2. Make Sure Everything Is in Writing and Carefully Read It
Never sign a contract without getting everything in writing. If the factor makes a promise verbally over the phone, get it written out. While verbal contracts are legally binding, it’s harder to prove that it was actually said when you don’t have it written out. If they’re unwilling to put it in writing, it’s a red flag.
Carefully read over the contract before you sign and submit it. Better, have a contract lawyer read it over.
The Best Way to Choose a Freight Factoring Company
When you take time to research and thoroughly investigate freight factoring companies, invoice factoring is beneficial to your business’s financial strategy. You get immediate payments and fuel discounts that can help your company thrive. However, you must do your part and make sure you carefully read over everything.
Look for:
- A company’s longevity and history in the trucking industry
- Online reviews specifically looking for patterns with frequent complaints about the same thing
- Other trucking companies’ recommendations, and picking trucking companies you trust
The last thing you need is to deal with the headaches of a scam. With Saint John Capital’s free business credit checks, decades of experience in freight factoring, low factoring rates, and lack of hidden fees, you don’t have to worry. Call or email us to learn more about how we can ensure you get paid the same day you deliver the goods.
