10 Tips for Reading and Understanding Freight Factoring Contracts

When you own a business, signing any contract is a big deal, and when you’re a trucking company preparing to sign a freight factoring contract, it’s a really big deal. It’s important to thoroughly read your factoring contract and make sure that you understand what every part of it means for your business. This post will walk you through important points in a freight factoring contract so you can put your name on the dotted line with confidence.

Look at These Terms and Conditions in Your Freight Factoring Contract

1. Check out the scope of services

It should be clearly stated in your factoring contract which services are being provided by the factoring company. Look for details about invoice processing, credit checks on customers, collections, reporting, and any additional services offered. This will help you determine if the factoring company can meet your specific business needs.

2. Get an understanding of rates and fees

Here’s the nitty gritty. What are you going to be paying for freight factoring? Be sure you look at the advance rates and fees the company will charge, as well as understand what those numbers will mean for your business. How much will they deduct from your invoices?  It’s important to note that there may be various fees sprinkled throughout the contract, so check carefully through the entire document to get an idea of what you’ll realistically be paying for your factoring services. You want to make sure the service aligns with your business goals.

3. Learn how funding will work

Funding terms should also be clearly outlined in your contract, and it’s important that you pay attention to the details here. How long will it take the company to send your money after the invoice is submitted? Are there scenarios where the company might not pay in the expected timetable or pay the expected amount such as disputes or customer chargebacks? Understanding how funding works will help you manage cash flow.
Funding terms can vary widely, and factoring companies may offer multiple funding options. For example, Express Freight Finance offers both traditional factoring and Instant Pay, a service that funds invoices immediately after they’re approved. Click here or call 877.697.0605 to contact our team to learn more about Instant Pay.

4. Find the contract duration and how cancelation works

Be sure you’re looking at how long your contract will last and what happens if you need out of your freight factoring contract for whatever reason. It’s important to note that freight factoring contracts auto-renew, so careful planning is a necessary part of timing contract cancellation. How does it work if you want to cancel?  Will you be charged fees if you choose to terminate your contract? These are all important questions that your contract should answer.

5. Recourse or non-recourse factoring?

Your contract should state whether you’re signing up for recourse or non-recourse factoring. Recourse factoring means your company is liable for unpaid invoices while non-recourse factoring means the factoring company is assuming the risk if your customers don’t pay. There are pros and cons to both, so make sure you understand the potential costs of each option and what they would mean for your business.

6. Look at how they’ll evaluate your customers’ credit

This might seem like something that isn’t really your problem, but in factoring, your customers’ creditworthiness can be a big hangup if the factoring company’s evaluation determines they can’t extend credit to one or more of your customers. Look at what criteria they’ll use to determine whether they approve or deny your customers so you can get a feel for whether it might be a problem for certain customers and plan accordingly.

7. Check into contract amendments and the renewal process

Look for how your contract shows that the company will handle the renewal of the contract or any amendments to the contract that need to take place. How will the company handle renegotiating changes in rates or terms? How much notice do they need you to give or how much notice are they required to give before making any changes or deciding not to renew the contract? This will help make sure you don’t get caught unaware by potential changes.

8. What is the factoring company doing to ensure confidentiality and data security?

There should be part of the contract that discusses how the factoring company handles confidentiality and how they secure your data, including account and payment information for not only your business but also for your customers. This can be a serious issue if mishandled, so make sure you feel confident in the measures they take to ensure confidentiality and data safety. This can help protect your reputation in the industry and mitigate risk.

9. Learn how customer service will help you

Different factoring companies offer different levels of customer service, and you should know upfront what kind of service you can expect. How issues are addressed and how often customer service or support helps you should be written into the contract. Look at whether they offer guarantees that problems will be solved or promise to address inquiries in a specific time frame, how they’ll handle disputes, and the types of support they’re willing to offer. Solid customer service that meets your needs can ensure a smooth experience.

10. Verify legal and regulatory compliance

If you choose a reputable freight factoring company, this really shouldn’t be something you need to be too concerned about, but business owners always must do their due diligence. Make sure there’s a part of the contract that explicitly states that the factoring company will adhere to applicable laws and regulations.

Conclusion

It’s critical that you not only read through your trucking company’s freight factoring contract thoroughly but also that you understand what it’s saying and what it means for your business. These tips for reading your contract should help ensure a transparent relationship with your factoring company so you can decide what’s best for your business confidently. If there’s anything you don’t understand, don’t hesitate to ask for clarification or seek legal advice before you sign your factoring contract. Need help reviewing your contract? The team at Express Freight Finance can help. Just call us at 877.697.0605.