Freight Waves reports that layoffs in the freight and manufacturing industries are impacting people across the nation. With big names like Amazon laying off tens of thousands, dairy producers like Hood and Saputo Cheese USA laying off or closing plants, and logistics and warehousing specialists also shutting down, trucking companies may start feeling the impact soon enough.
Experts believe that high spot rates and weak volume will drive trucking industry insolvencies in 2026. If you’re going to make it through this challenging market, you need money to keep your trucks on the road, employees happy, and bills paid. Money is everything, and it may seem challenging. Now is the time to take proactive measures to keep your business from insolvency.
Maintaining a steady cash flow is everything, and freight factoring is one way to ensure you handle the turbulence. Working capital is important, but you must focus on protecting yourself. A predatory factoring contract could be your downfall. You need to partner with a reputable freight factoring company.
Understand Freight Factoring and Your Obligations
When you sign up to work with a freight factoring specialist, you agree to sell your accounts receivable at a discount. If you have a trucking contract where you do $10,000 a month, you would sell your unpaid invoices to a factor. They collect the money, minus the factoring fee, and pay you immediately.
Because you get paid as early as the same day, you don’t build up credit card debt or take out business loans you struggle to repay. While many carriers end up insolvent because their debt exceeds their revenue, you have a steady cash flow and avoid high-interest business credit cards, late payments, and fines for being unable to pay essential business expenses.
Factoring is one of the best ways to keep your trucking business afloat in challenging times, but predatory contracts don’t provide the help you need. Knowing the 17 red flags is essential when it comes to avoiding a bad factoring contract.
A Comprehensive List of Freight Factoring Contract Red Flags
When you’re narrowing down your potential freight factoring partners, look for these red flags.
1. Aggressive Non-Compete Clauses
If you’re given a restrictive list of companies you cannot factor with in the future, don’t sign. Some companies add non-competes to prevent you from leaving their factoring company for a competitor. You should never be restricted from moving to a different company if you don’t feel a factor is meeting your trucking company’s needs.
2. Broad Recourse Clauses
There are recourse agreements and non-recourse agreements. A non-recourse agreement protects you from having a client who fails to pay the factor for certain reasons, such as bankruptcy.
The clauses attached to recourse agreements need to be clear. Make sure you understand when you must repay the money and what penalties are applied if you don’t have the money in time.
3. Collateral Demands
You shouldn’t have to put your trucks up for collateral with a freight factoring agreement. Unpaid invoices are the collateral, but some factors require additional collateral with certain carriers. If you’re asked to put your business equipment or property up as collateral, find a different factoring partner.
4. Deceptive or Unrealistic Factoring Rates
Low rates are great, but they’re not always realistic. If you own one truck and are an independent owner, a 0.5% factoring rate is unbelievable. Look into the offer as it might be a limited-time rate that suddenly quadruples a month from now.
5. Evergreen Clauses
Evergreen clauses are also known as automatic renewals. If there is an evergreen clause, what do you have to do to get out of it? Are you required to send a letter of cancellation within 90 days of the renewal? If you miss the deadline, can you cancel easily, or are you stuck for another year?
6. Hidden or Unclear Fees
Make sure you know the fees that are going to be charged. Some of the most common include
ACH/wire transfer fees
Credit check fees
Early termination fees
Invoice processing fees
Minimum volume fees
Reserve hold fees
7. High, Urgent Pressure to Sign
After you call or email the company to learn more about freight factoring agreements, are you feeling pressure to sign immediately? If you are pushed into a contract with one-day-only promises, it’s often a tactic to hide shady contract terms. The quicker they get you to sign, the less likely you are to seek a contract attorney’s advice.
8. Minimums Required
Are you forced to submit a specific number of invoices each month? If there are minimums, can you meet them? You don’t want to face fines or penalties for missing minimums.
9. Poor Customer Service
How accessible is customer service? You should be able to easily reach them when you’re on the road and not in the office. Having customer service available by phone, an app, email, and even chat is beneficial.
10. Reserve Fund Claims for Non-Invoice Reasons
Find out if the factoring company is allowed to claim your reserve funds for reasons outside of unpaid invoices. If they’re allowed to take reserve funds for things like damaged merchandise, it’s a problem.
11. Rigid, Long-Term Contracts
Long-term contracts are not advisable. You should have the right to cancel a contract if it’s not a good fit. Month-to-month contracts are better than one that locks you into the contract for a full year. If you are in a long-term contract and need to cancel, what is the penalty?
12. Sudden Rate Increases
You’re offered a 2% freight factoring fee for the first six months. After that, it jumps to 6%. That’s a sudden, unfair rate increase. Learn why the rate increase is so substantial.
13. Unclear Timeframe for the Release of Reserve Funds
Once your client pays the invoice, when are the reserve funds released to you? If you are told you must wait for weeks or months, don’t sign the contract. Funds should be released quickly.
14. Unreasonable Reserve Policies
Freight factoring companies pay you immediately, but some arrangements leave a percentage of the funds in a reserve account pending your client’s payment. You’ll often see arrangements like 90% paid, 10% reserved or 95% paid, 5% reserved. If it seems unreasonable, ask questions to learn why the policies aren’t standard.
15. Vague Terms
If there are terms that seem deceptively vague, never sign the factoring contract. You need to understand exactly what your responsibilities are and what the factors’ responsibilities are. If any of it is unclear, it’s a problem.
Choosing the Best Freight Factoring Partner
Factoring is one of the best ways to build a strong, healthy trucking company in tough times. However, it must be entered into responsibly. Never sign a contract if you don’t understand what you’re agreeing to. Have a contract attorney look over the freight factoring agreement before you sign.
It’s also important that you trust your gut. Your instincts are important. If you sense something seems shady or too good to be true, it is. It’s better to keep searching for a freight factoring partnership that meets your needs without being deceptive or unrealistic.
Ask these questions before agreeing to partner with a freight factoring partner.
Are credit checks free and unlimited, or do I pay for them?
Are your contracts fixed terms or month-to-month?
Can I get fuel discounts through a partnership with your company? If so, how much?
Do I get to pick and choose the invoices I submit for factoring?
Do you charge penalties? When or why?
Do you have minimums or a specific contract timeframe requirement?
Do you provide a copy of the contract that I can bring to an attorney before I sign?
Do you specialize in the transportation industry? How long have you been in this field?
How do I reach customer service? What are your customer service hours?
How is the money transferred to me?
What are your transaction fees?
What is the factoring rate for my company, and how did your company calculate it?
What percentage is advanced upfront?
What specific situations are covered by a non-recourse policy with your company?
Saint John Capital prides itself on having some of the lowest industry rates and fair contract terms. We encourage you to take your time and fully understand your contract before you sign. If you have any questions, reach out our customer support team is happy to answer them or go over anything you don’t understand.
