- 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.