Factoring: Freight factoring is a financing tool that provides your company with immediate capital. Not a business loan, factoring involves selling your invoices at a discount. In turn, you get immediate cash, and the factoring company – not you – waits for payment.
REMEMBER, FACTORING COMPANIES COME AT A HIGHER PRICE THAN LOANS BECAUSE IT’S IMMEDIATE ACCESS TO CASH. Factoring companies will give you many reasons to use them but asking the below questions are in your best interest!
Questions you should ask any factoring company before signing up:
1. What are your terms?
a. Is there a contract? If yes, is there a price break or flexible rates since you are locked in with their company.
i. Does the contract automatically renew itself or is a signature required each year (option 2 is best).
ii. Is a notice needed if you don’t want to renew the contract at the renewal date? If a renewal is needed, how much of a notice is required?
b. Will the rates be adjusted on my increased factoring volume or competitor rates?
c. Is there a sign on fee?
i. If there is a sign on fee, ask the company to waive it. I’m a firm believer you should not have to “sign up” with a company to use their services. You will be paying a percentage each time the service is used therefore the sign on fee is a rip-off. Companies that require a sign on fee normally state it’s to process the paperwork – again, ask to have the fee waived.
2. Do you offer recourse and non-recourse factoring?
a. STAYAWAY from any factoring company that requires recourse. The factoring company should offer FREE, UNLIMITED credit checks. If your company is making use of the credit checks and they are telling you that hauling for a specific company is safe, pay you upfront the invoice balance minus their percentage fee and then not get paid = that’s on them. NOT YOU.
b. Another word for recourse you will hear factoring companies use is reserve. If the company has a recourse program or a reserve program, find a new factoring company.
3. What is your fee structure?
a. Steer clear of any factoring company charging more than 3.99% per invoice. 3.99% on any invoice is high enough. Anything over 3.99% is taking advantage of your inexperience with factoring.
b. How much is the fee for money transfers?
i. Which is cheaper, direct deposit or EFT?
c. What is the cut off time for transferring money to your bank account?
d. Are there any other fees for services?
4. How long have you been in business?
a. Be careful working with a new factoring company. They may not have the overhead to pay you in a timely manner. It’s important funding is always available when you need to turn in invoices.
5. What else can you do for me?
a. Fuel card?
b. FedEx program?
c. Cash Advance? If yes, make sure you ask what the prime rate is for this advance plus the %. Ex: Company charges a prime rate + 2%. Anything over 2%, stay away from.
d. Back office support?
6. Do you specialize in the Transportation Industry? It is imperative to factor with a factoring company that understands the Transportation Industry.
7. Is a mobile app available for faster funding?
Hopefully you are now more knowledgeable in choosing a factoring company for your company’s needs.