Invoice factoring is one of the most accessible financing tools used by owner-operators and small fleets throughout the U.S. If you’re not already familiar, invoice factoring allows truck company owners to sell their invoices for immediate cash instead of waiting for 30+ days to collect from shippers/brokers or pay 5% Quick Pay fees.
Although factoring is not something you find at a bank, it is still a financial transaction and as with most financial transactions there is a contract filled with commitments, rules, potential penalties etc.
Here are some tips to maintain a healthy relationship with your factor and steady cash flow for your business:
1. Know your Term and keep your options open.
- Factoring agreements often come with a 12-month term set up with automatic 12-month renewals starting on an “effective date” usually listed in the opening paragraph or starting on the date the contract was signed.
- Reference the “Term” or “Termination” section of your agreement to understand not only when you can terminate the agreement but HOW. Most times a factoring company will require a written notice to be sent at least 30 days in advance of the term’s end date. Sometimes these notices are due 90 days in advance.
- Get into the habit of setting a calendar reminder to send a written notice to not auto-renew your agreement. This way you can allow your current factor to review your account and potentially offer a better rate to retain your business. Or you are free to at least see what other options might be when it comes to rate, technology, or service.
2. Understand your Fees and how you can better manage them.
- Other than the 1-3% factoring fee, there is usually a method of funding fee based on how you choose to collect your funds. A wire fee is normally $20 while an ACH could be $5.
- The fees are charged only one time and not on every invoice if you are submitting more than one invoice at a time.
- It’s good practice to know when you need cash posted to your account and if you can submit batches of invoices once a week and minimize the amount of fees you are charged. This is better than submitting one invoice a day or every other day and paying the fee multiple times a week.
3. Track your Invoices.
- Your factoring company should provide you with access to know what invoices have yet to be collected after you have received funding for them. A standard factoring agreement allows the factor to wait up to 90 days to collect payment from your customer. After day 90, the factoring company can charge the invoice back to you if there was a dispute with the invoice or if the shipper/broker simply did not pay.
- Check your factored invoices weekly to make sure there aren’t any invoices going unpaid for over 30 days. Then work with your factor to see if they are having issues getting in touch with the customer or if there is a dispute you are unaware of.