In uncertain times, and even in the best of times, there may be instances where you as an owner-operator run into cash flow problems and need to pay your bills. It’s here that you may turn to a factoring service for a temporary and short-term answer. Keep in mind however that you are borrowing money from lenders who are not in business to lose money. They will place obligations on you that may be a burden if you are not careful. As OOIDA has stated many times before, and will continue to do so, you must both read and understand the agreement before you sign it.
We have included some potential concerns and problems that you may encounter below.
A Uniform Commercial Code-1, or UCC-1 financing statement, is a legal notice that creditors file as a way to publicly declare their rights to potentially obtain the personal properties of debtors who default on business loans.
The bottom line: There are two types of UCC-1 statements
- blanket liens, and
- liens attached to specific collateral (the latter being the most common for carriers, such as your business equipment).
There are essentially two ways to remove a UCC lien.
- Ask the lender to immediately remove the lien upon full payment of the loan by filling out a UCC-3 statement.
- If lender doesn’t do this, you may go to the Secretary of State office and swear under oath that you have fulfilled the debt in full and ask that the UCC-1 be removed.
- Most factoring services will advance only a percentage of the purchased receivables and put the rest into an escrow account. The Factoring Service has full access to the escrow account. You need to know:
- Who has access to that account?
- Is interest paid on that escrow?
- If all invoices are paid is that escrow returned?
- Is there a cap on the escrow account?
- Many brokers and shippers will not deal with a third-party invoice service or factoring company.
You need to know: What percentage of shippers refuse to deal with a carrier that uses factoring services?
- Factoring companies often reject certain brokers and/or shippers. They may have had bad experiences with them before. This could be good to know.
You need to know: What percentage of invoices are usually accepted by factoring services?
- Most factoring services check out the history of brokers and shippers, as should you.
You need to know: Do most factoring services demand that all invoices be approved by them before they accept the invoice?
- Many factoring services demand that all invoices go through their service.
You need to know: Can you take on other invoices without going through the factoring service?
- Factoring Services will check out brokers and shippers past history of payments.
You need to know: How does the factoring service determine if they will accept an invoice?
- The OOIDA Foundation puts this in bold print because it is so important.
You need to know: Must you agree to Recourse Factoring—which in case of a default, the factor can deduct the agreed funds advanced from the escrow and usually an additional fee?
- Factoring companies take control of your invoices and thus your income.
You need to know: How much of your business are you willing to give to the factoring service, as you will be required to send a “letter of appointment” to all your customers requiring that they pay all invoices to the factoring service?
- You may get back on your feet and want to buy another truck or trailer.
You need to know: Does this factoring service agreement have a clause that prohibits you from securing any other loans?
- Very few factoring services will allow you to factor a single invoice.
You need to know: Does this factoring service require that a certain number of invoices be sent per month? The factoring service may offer incentives for you if you promise a larger number of invoices, but they might also impose penalties if you cannot get those invoices.
- All invoices have a time frame agreed on for payment of the invoice. Factoring services (and you) of course want those invoices to be paid as quickly as possible.
You need to know: If the invoice is it is not paid in the time frame agreed does that factoring service charge you an extra fee and/or do they take it out of your escrow?
- While UCC-9-506 allows for termination of factoring agreements they are often difficult to exit and often have a termination fee.
You need to know: How easy is it to terminate and are there termination fees?
- Many factoring agreements have various fees attached be sure and check for these.
You need know: Look for any language that requires you pay a fee.