10 Things You Need To Know About Your Next Factoring Contract A guide to the questions you should ask before signing your next factoring contract 5 Star Freight Factoring 1-888-393-5061 Page 1 of 12
Introduction The freight trucking industry is a cash-intensive business and factoring has evolved into a complex web of providers, some of whom are honest and wellmeaning professionals that will work hard to assist you in obtaining the cash flow necessary for ongoing operations. You can also find less reputable providers that will say and do most anything to get you to sign a contract that they would prefer you not read prior to signing. This guide is designed to help you ask informed questions of your factor BEFORE you sign the contract. At a minimum this guide can help you avoid the frustration and headaches that come with things not being as you thought they were. This guide can potentially save you not only frustration and headaches but also thousands of dollars that can surely be put to better use elsewhere in your company. This information guide is provided to share an opinion and should not be interpreted as legal advice in any form. Every contract is unique and we encourage you to seek appropriate legal representation with any contract you sign. Page 2 of 12
One Night In A Des Moines Truck Stop Cost Him $40,000 We met Pete last year as he was trying to put the pieces of his trucking company back together. We worked with Pete on factoring a single truck and while getting him set up he explained his story and how thankful he was just to be back on the road. We asked Pete if we could share his story anonymously and he said yes. Pete s story started out just after Thanksgiving 2010 when he dropped a load in Des Moines and he was getting ready to take a load to Kansas City where he would overnight and then haul another home to St. Louis. Pete s wife had just had surgery for a knee replacement and he needed to get home to help care for her. He had been waiting for a deposit to clear so that he could fuel for the return trip. Logging in to his account he saw that the deposit had not cleared, this did not make sense but he would have to wait it out until the bank opened in the morning. Without knowing about it, a series of events was now starting to unfold that would ultimately threaten Pete s livelihood and also put a dent in his marriage. After the bank opened the next morning he still did not see his deposit and called the bank. The woman on the phone from the bank explained that they had an issue with the deposit and would need to confirm it before making the funds available to him. They estimated a few hours The surgery Pete s wife needed had set them back financially; he was tapped on credit and would have to wait for the funds to clear. It was late afternoon before his deposit had been confirmed and he set out for Kansas City, more than a day behind schedule. Page 3 of 12
Over the course of the next two days Pete would lose another day due to late arrival and a closed dock. His wife tried to drive herself to a doctor s appointment and fell in the parking lot and had to be taken by ambulance to the hospital. Pete gets this news while unloading the next morning in Kansas City and with no time to load he decides to deadhead home. Pete s wife had re-injured her knee and would need to go back in for an additional surgery. Pete was concerned about his wife but now also very concerned about their growing medical bills and his now-idle truck. Pete s wife came out of surgery fine but he needed to stay with her until she could get around safely on her own. Three weeks later he was still idle with credit problems and mounting medical bills. He had to get back on the road. Pete s sister finally came in from Tallahassee and he got back on the road, his truck had been idle for nearly a month. Pete estimated that he had lost close to $40,000 counting lost income for loads not delivered, medical bills for the second surgery and follow-on issues that his damaged credit had cost him. We asked Pete when he called us if he had factored before and he said that he had not, he always felt that it was too expensive and he didn t want to lose out on the 3%. We asked him why he was calling us now and he then he told us the story of the $40,000 mistake and how he would never let a factoring fee get in the way of his life again. We have heard other stories similar to Pete s over the years, thankfully none quite as costly as his, though each one was very significant to the person regardless of the money involved. Page 4 of 12
If you drive for a living you know how cash intensive this business can be and you understand the risks and what idle time could cost you. Factoring is an operating expense but the right freight factoring arrangement can also be a very smart cash management strategy that functions like fifth wheel grease for your finances. Factoring is not right in all circumstances but when it is right it is important to get the best deal possible. We developed this guide as a way to better understand the ins and outs of factoring. How to ask questions of each and every factoring company you talk to so that you can get objective information from everyone and then make the decision that is best for you. Page 5 of 12
Evaluating Freight Factoring Agreements We call out that the right freight factoring agreement can be a smart cash management strategy because the wrong factoring agreement can create its own set of issues. We see a lot of factoring agreements pass our desk from virtually every competitor out there and the number of wrong deals is surprising. We strive to educate anyone that calls us on the process and what to look for in any agreement, ours or anyone else s. We put this guide together based on our experience of mistakes that we see repeatedly, we often ask questions about how these terms are put together in an existing agreement and too often the answer is I don t know. If you are considering signing an agreement, extending an agreement or factoring for the first time we recommend asking these questions. These are not the only questions you should ask but these are some of the details that may turn out to be significant down the road. We would love to answer these questions for you about our agreements as well. We strive for transparency in all of our dealings and encourage you to compare our deal with any other proposals you have. Now, on to the questions Page 6 of 12
1. Term & Renewal What is the length of time you will be bound by the contract and how will it renew? Three to six month terms are best but one year contracts are not uncommon. Scrutinize terms longer than 6 months and use longer term contracts as negotiating points on other terms. Ensure you understand the renewal provisions once the term of the contract expires; many contracts have auto-renew provisions that require you to provide advance notice of your intent to not renew. Failing to get in front of an auto-renew provision can lock you into an additional term. 2. Reserves How much is held in deposit and when can you recover it? Most factoring companies will hold back a reserve that is the funds remaining after an invoice and the factoring fees have been paid. Some of these funds will be held in deposit to guard against bad debt; these funds are often not released to you until the account is closed. Look at the amount of money that can be held in deposit, this is your money that you will not have access to until the account is closed. Remaining reserves above those held in deposit will be returned on a periodic basis with two to four weeks being typical. This is your money that is being held back so a shorter reserve holding period is better. Page 7 of 12
3. Funding vs. Getting Cash When the timing of cash flow is important you need to know the difference Funding an invoice is the process of presenting an invoice to your factoring company. Many factoring companies will claim same day funding or 24 hour funding but that does not necessarily mean you will have cash within 24 hours. It is not uncommon for funds to take 48 hours or more to actually appear in your account. The processing of submitted invoices should occur within the same day up to a cutoff window, anything submitted after this cutoff will process the following day. You should therefore look for a cutoff window that is as late in the day as possible, ideally a minimum of 2:00PM EST. ACH deposits will typically take 24 hours to clear and your factor may charge fees from $0 to $20 for an ACH deposit. Wire transfers will clear within an hour or two and you should expect fees from $20 to $50 for a wire transfer. Understand your options and recognize that these could change over time, you may not typically need the speed of a wire transfer but it is good to know what it would cost before you need it. 4. Online Account Access Now a commodity feature Not long ago online access was a unique benefit, today it should be a pass/fail criteria. Factoring companies that can t provide online 24 hour access to your account may be lacking critical infrastructure to properly support your business. Keep asking questions. Page 8 of 12
5. Contract Minimums Paying for not using available credit Some contracts have minimum volume requirements to maintain an active account status, effectively requiring you to submit a minimum amount of invoices within a set period. Failure to meet these volume requirements may incur a fee. Similarly, minimum account fees may be charged regardless of the volume that you factor. Minimum factoring volume and minimum account fees may or may not be linked in your contract; that is you could incur minimum account maintenance fees AND fees for not meeting minimum volume requirements. 6. Hidden Fees The devil is in the details A contract can contain fees for almost anything you could think of and while many of these may be small ancillary fees that can certainly add up over time. Beware of getting nickled and dimed from these fees by looking for them and understanding when they apply and what you can do to avoid them. Common fees include invoice processing fees, ACH or wire transfer fees, credit check fees, minimum factor fees and numerous others. These fees can be lucrative for factoring companies and costly to you so read your contract carefully and don t hesitate to question anything that you don t fully understand. Page 9 of 12
7. Advance Understanding the obvious Most factoring companies will tell you that they advance a certain % and charge a certain percentage but it may not be clear if the charge is included in the advance % or not. An example is a company that advertises a 90% advance and charge 3% but on first funding a trucking company may find that the fee is taken out of the advance and so the net proceeds are actually 87%. Don t assume that a 90% advance implies that you will receive 90%, seems obvious but it may not be. 8. Up Front Fees and Exit Fees They can get you coming and going Account setup fees are common to offset the expense of initial credit checks, UCC searches, due diligence fees and filing fees. These fees can range from $200 to over $1,000 per account but can often be deducted from first funding to reduce out of pocket expenses. These fees should not be incurred unless you are guaranteed funding. You may see an application fee which is typically non-refundable and should be avoided; this is pure profit for the factor and should be avoided. Many contracts may provide for exit fees to close UCC fillings and manage open invoices. These fees can again range from $200 to over $1,000 but may be waived for customers in good standing at the time the contract terminates. Page 10 of 12
9. Contract Termination Getting out You should enter into a contract with a clear understanding of how you can exit that same contract. How much notice do you need to provide before you can close the account or the account renews? Knowing how hard it will be to exit and how difficult your factor may make it for you to exit can be tough to figure out. Look for specifics in your contract and also be very wary of any verbal promises along the lines of that is something in all our contracts, we never enforce that. 10. Recourse vs. Non Recourse Not always what it seems There are few things more misunderstood in factoring than recourse. Too many people falsely believe that a non-recourse contract eliminates the possibility of them being liable for an invoice that does not pay on time. True non-recourse contracts are typically expensive and contain restrictions on who you can factor and strict condition under which non-recourse applies. Typically, non-recourse applies when the invoice payor is insolvent and goes out of business which is not likely. Slow pay or no-pay will typically get recourse. If you believe that you need a non-recourse contract study it carefully and seek legal counsel to ensure that you understand the terms and conditions when recourse applies and when it does not. Page 11 of 12
5 Star Factoring Agreement Audit To further help you maximize your cash flow with factoring 5 Star has developed a 10-minute Factoring Agreement Audit which we conduct over the phone with you and one of our top staff members. What we accomplish in the fast-paced zero-nonsense session is: Establish a baseline for current market rates based on the number of trucks you are running Identify the Big 3 gotcha s that you need to understand, and how to ask about them to get information that is useful for comparison You will walk away with a punch-list of evaluation criteria that will put your knowledge ahead of 95% of all others who are negotiating a factoring agreement This presentation is conducted by Todd Dipilla who is a factoring industry veteran that has written and reviewed factoring agreements for many different factoring companies. Please be assured that this consultation will not be a thinly disguised sales pitch; it will consist of the best intelligence Todd can supply in a 10 minute time span. There is no charge for the call, but please be advised that the call must be strictly limited to 10 minutes. The consult will typically take place within three working days of your call. To secure a time for this call please email Todd@5StarFreightFactoring.com or call 1-888-393-5061. Page 12 of 12