Starting up a new factoring relationship can be daunting. Whether you’re just starting up with a factoring company for the first time or trying to exit you’re current relationship, you need to pay attention to the fine print because they might try to force you into a position that you’re not comfortable with and ultimately your factor might be putting your business in a financial hardship rather than helping you grow. There are a number of areas to watch out for when entering or even exiting a relationship with your transportation factoring company:
1. Credit Facility – Great, you’ve been approved for $100,000 in credit facility. But do you really need it? Watch out for termination fees or administrative fees calculated off this number because they might be giving you a high number which you think is great but really it’s hurting you in other areas of your contract.
2. Termination Fees – Termination fees with factoring agreements are pretty common and to be expected. It’s no different than your phone service provider, television provider, or any other company you’re working with to establishing a term length. If you want to leave early, there should be fees associated with it. Just make sure you shop around and find a transportation factoring company who is transparent about the fee and explains why it’s being charged. At some point you’re going to want to leave so just make sure you understand what it’ll cost to do so.
3. Termination notice period – Sometimes you only have a very specific window to notify your factoring company that you are trying to terminate. Make sure you are aware of when that period is and be prepared so you don’t have to incur termination fees as described above. Also, if you don’t provide proper notice, you may be stuck into another 1 year renewal period without even knowing it.
4. Notice Locations – We’ve seen other transportation factoring companies demand unreasonable notice locations and unfair circumstances in order to provide notice of cancellations. In order to cancel you must submit a notarized letter to the address located below in a remote village in the Caribbean with a smiley face on the upper right hand corner and must be hand written, typed, and pressed in brail in order for it to be valid. It’s unreasonable! Understand the notice clauses in the agreement and reach out to OperFi personnel if you think you’re being treated unfairly.
5. Rates and Reserves – This is obviously a common and critical point of your agreement but make sure you understand why your reserve is being held. Do you have access to your reserve? Do you understand your reserve. Often times factors maintain a reserve and they don’t understand how it’s even being calculated. If they can’t make heads or tails out of it, how do they expect you to? Make sure you stay on top of your reserve balances, understand what your contract requires and watch out for agreements that force you to maintain a certain level of reserve even if your company doesn’t have a history of short pays.
6. Recourse vs. Non-Recourse – Yes, there is a major difference between the two but just because you have a non-recourse factoring contract, doesn’t mean you’re completely free from any risk. Non-recourse sounds great on a factoring agreement, but do you understand when you’re not obligated to purchase back the invoice? What distinguishes when your risk has fully transferred? Usually non-recourse is only present when the broker or customer goes out of business, files for bankruptcy, or cannot pay their financial obligations. Pay attention to the triggers of when non-recourse actually exists. Otherwise, you may still get charged back on an invoice even if you thought you couldn’t get charged back at all. Also, understand that non-recourse agreements usually come with higher fees for the greater risk. So you might be paying for a higher factoring rate when really non-recourse would be very rare. You might be better off paying a lower rate and sticking with a recourse contract and watching the customer’s credit.
If you don’t fully understand your factoring agreement during entering or exiting your relationship, it may be time to reach out and find another factor who will best suit your business needs. OperFi specializes in the 1-5 truck operation and takes pride in helping small business owners and trucking entrepreneurs succeed. Give us a call so we can help you with your research and make sure you’re taken care of.
Here at OperFi, we make it our mission to provide our clients with the operational resources and working capital for our clients to grow.