In a freight factoring agreement, you get same-day payments or payments that arrive within a day or two by selling your invoices. It’s essentially a cash advance that occurs by permitting a factoring company to buy your accounts receivable in exchange for faster payments.
Suppose you do a lot of work for a company that tends to wait until the end of the month to settle all monthly invoices. The runs you do in the first week of the month won’t get paid for weeks, and for a small trucking company, that wait can be detrimental. When you finally do get paid, there’s also the time it takes for a check payment to arrive in the mail and clear your bank. All of this waiting can be stressful, especially as you put off paying bills until you have the money.
A freight factoring agreement ends this problem. You deliver a load, submit your bill of lading to the factor, and get paid immediately. If you have the company’s fuel card, you can get paid on the same day in some situations. At most, it usually doesn’t take more than a couple of days to get the funds deposited into your business account.
In exchange for faster payments, you do have to pay a small freight factoring fee. Across the U.S., it’s uncommon for this fee to be higher than 5%, which is far less than paying bills on a credit card and then dealing with accruing interest until you get paid. It ends up being an advantageous way to take on new clients, grow your business, and have the certainty that you’ll be paid quickly. But, you can’t forget that freight factoring is an agreement with legal ramifications.
What Are the Legal Considerations of Freight Factoring Agreements?
While that is a quick summary of what a freight factoring agreement is and does, there are legal considerations you need to keep in mind.
Governing law is the first thing you need to keep in mind. There’s going to be a clause on governing law, as every state has its own laws relating to freight factoring. There is no federal government body that regulates this business, it’s up to states to set their laws. Your business may be located in a different state than the freight factoring company, so you must be clear on which state’s laws apply.
Assignment of Receivables:
Before a freight factoring agreement starts, you have to legally assign your accounts receivable to the freight factoring company. You’re giving that company legal ownership of that specific account or several accounts, depending on how many brokers or shippers you’re asking to get faster payments for.
You might have some long-time clients who pay quickly. You trust them and there’s no need to have those invoices factored. With a factoring arrangement, you don’t have to factor every invoice or client you have, you should be able to pick and choose which accounts receivable you’re assigning to the factor.
Accounts in Default:
If one of your clients doesn’t pay the factoring company, what happens? This is where default and remedy clauses come into play. In some arrangements, an account that goes into default may require you to return the cash advances you received. This is a recourse agreement. There are also non-recourse agreements where you’ve been paid and you will never be asked to repay advances if your client doesn’t pay what’s owed.
Some companies use a cross of the two where you are obligated to repay a certain percentage and the freight factoring company covers the rest. When you’re entering into a freight factoring agreement make sure you are comfortable with requirements placed on you if your broker or shipper’s account goes into default.
If you suddenly go out of business, any remaining money owed on outstanding invoices would go to the factoring company. A bankruptcy court couldn’t immediately take the money owed on outstanding invoices to settle your debt.
Warranties and Representations:
You do have to be honest when filling out a factoring application. You need to point out any liens that are in place, the financial condition of your business, and how you’ve been paid and managed your invoicing in the past. If you’ve extended a discount to your client if they pay within 10 days of getting the invoice, you need to make the factoring company aware of information like this.
It’s also in your best interest to make sure you understand the best steps for researching and approving work from newer companies if you plan to factor those invoices. You were looking at a load-finding board and came across an appealing job. You may need to perform due diligence researching that company’s payment history and business rating before taking on the work if you’re going to ask to have those invoices factored too.
If there are changes to a freight factoring agreement, notices is the area where the terms on how much advance notice must be given by you or by the factor. This can include how quickly you get paid, how you deliver bills of lading or invoices, and the forms that are used, either electronically or on paper.
Do Your Research and Make Sure You Understand What You’re Signing
Before you enter a factoring agreement make sure you understand what you’re signing. If you have any questions, consult a legal professional. You should never enter into a legal agreement without fully understanding your obligations. Ask your business attorney to look things over.
It’s okay to ask for a contract to be amended to make sure the language is clear. Any factoring agreement must be fair to both parties, and you’re not being forced to enter the agreement. If you’re not comfortable with the terms, do not sign on the hopes it will get better in time.
You can try to negotiate terms that are more favorable to you, but you need to remember that the factoring company is taking some risk, so the agreement cannot just favor you and put that factoring company at risk if your broker or shipper fails to pay as promised.
How Do You Find the Best Freight Factoring Company?
How do you choose the best factoring arrangements for your trucking company? You want to get paid quickly, but you don’t want to take on an excessive amount of risk. With so many companies out there, how do you pick one?
Start by looking at the company’s history. A brand-new freight factoring company may be legit, but there’s little longevity to prove the company’s reliability. Saint John Capital started factoring for freight companies back in 1997. We have a long history in the freight factoring business and offer a range of services including freight factoring with same-day payments, 100% factoring advances, and competitive factoring rates.
Talk to us about getting paid quickly, using services like find loads technology to find more work or a business Visa for fuel discounts and same-day payments. Reach out to Saint John Capital to get started with fast payments with some of the lowest factoring fees in the industry.