Having money tied up in unpaid invoices is a challenge that many small trucking companies face. Receivables factoring is one way that a company can get their money sooner.
A factoring company pays the invoice to the trucking business up front so that they don't have to wait for 30, 60, or 90 days to receive payment. In exchange, the loaner, or factoring company, charges a fee.
The invoice is then paid directly to the factoring company in most cases. If you make a delivery and the invoice is for $1000 with a fee of 4%, the factoring company would pay you $960. This service seems pretty straightforward on the face of it.
There is a problem with this service, however: hidden fees. If you aren't careful, factoring fees can add up, causing you to question whether the service does more harm than good.
It's not only factoring companies that are hiding fees in contracts. These hidden fees are costing Americans billions of dollars each year! It's become so commonplace that many people have accepted it, but you don't have to!
Let's look at some questions a company should ask to avoid surprise fees.
What is This?
You should never worry about asking what something means. Often, people will let things slide because they want to give off the appearance of being knowledgeable.
Never fall for this. The only bad questions are the ones you don't ask.
If you don't understand part of an agreement or it rubs you the wrong way, don't be afraid to speak up. You are the consumer in the arrangement, so it's the factoring company's job to answer any concerns and earn your business.
What is the Minimum Volume Fee?
Most factoring companies have minimum factoring fees. If the fee is 25.00 per invoice, and the rate is at 5%, your invoice has to be $500 or more to avoid paying extra. Small businesses doing local routes might not hit the mark.
Make sure you know what the minimum and the fee is before signing up for factoring service. There will be months when business is slower, so you'll want to factor this into your decision.
What Are the Length of Terms?
Most companies don't want to pay factoring fees forever. Much like a payday loan, they just need a little help to get them through a rough spot while waiting for clients to pay their bill.
Some factoring services will try to get you locked into terms for a while, however. Length can run from invoice to invoice to a year. If you are a small company, a year is a long commitment. Find out upfront so you can make the best decision.
Is There a Termination Fee?
Speaking of the length of terms, find out if there are termination fees if you decide not to use the service anymore. You don't want to be forced to use a service for a year if you only need it for a few months.
There are some factoring services out there that will charge you $1,000 to get out of an agreement early, in essence punishing you for your success. Don't let them get you to sign a contract that you'll regret later.
Do You Offer Non-Recourse Arrangements?
This question can save your company a lot of money. When using a factoring company, your client will pay them instead of you since you have already received funds.
Recourse factoring terms are such that if your customer doesn't pay the invoice, you are responsible for it! This arrangement could take a heavy toll on your company if you have a frequent customer that decides to default.
Non-recourse arrangements mean that the factoring company takes on the risk of the invoice in the hopes that more people will pay than won't.
Even with non-recourse agreements, companies will still find ways to charge you. If a customer doesn't pay the invoice, they will make you pay processing or other fees.
Often, these charges are excessive and can cause you severe hardship. You don't want to think everything is going great, only to find out an invoice from 3 months ago has to be paid by you.
What Other Factoring Fees Do You Charge?
One way a factoring company will protect themselves from taking on risky invoices is to run a credit check on your customers. It's an understandable step, but you shouldn't have to pay for the credit check!
Make sure they don't try to sneak that charge onto you. There are other random fees that a factoring service will try to put on you as well, such as:
Rush Funding Fee
If you run a small outfit and one of your trucks goes down, you might need your money a little faster than usual to get it back on the road. Most companies offer rush funding, helping you receive your funds faster.
This service comes with a fee though, sometimes flat rate and sometimes percentage. Find out which it is so you can make a better-informed decision.
ACH Fees
An ACH is a direct deposit payment directly into your bank account. It shows up quick and is the preferred method for receiving money for a lot of businesses.
Factoring services often charge fees for this. If you use rush funding, the service could charge you a fee for ACH and rush funding! Clarify this with the service before deciding what to do.
Miscellaneous Fees
When a company notifies someone that they have a claim on a debt it's called a UCC-1 filing. A factoring service will deliver this to your customers if need be to let them know who to pay.
Some companies will charge you for this. At $100 bucks or more a piece, it can get expensive if you are on a long-term contract with a factoring service and a few customers fall on hard times.
Some companies will charge you if they have to send someone a copy of an invoice! This practice is one of the more frivolous fees out there, and you should be suspicious of any company that does it.
Some companies will charge you a closing fee once you have setup a contract with them. Make sure you find out before signing anything, and look for someone else if they charge this fee.
Avoid Factoring Fees the Easy Way!
If these factoring fees make your head spin, you aren't alone. We hear from people in the industry all the time that just want a straightforward and honest way to get the funds they need.
That's why here at ComFreight we've come up with the HaulPay service. It's factoring made easy; you get the money you need without having to worry about hidden fees. You provide honest and dependable service for your clients; now we want to provide the same for you.
We will even show you how much you'll save per year with us vs. other factoring companies! Go here, look at our simple fee sheet and see the difference for yourself.
If you like what you see, sign up here today!
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