Using a factor is a lot like an arranged marriage – it's easy to get into, but getting out of the agreement can be hard. Here are 5 facts about factors that every owner-operator or small fleet owner should consider, before signing a contract:
1. Knowledge of Trucking: Like truckers, freight factors are in business to make money. There are major differences between the two industries, however. Not all factoring companies have people on their staff who understand trucking. Don't sign with a factor unless there is someone there who knows your business, who has work experience as a driver, a dispatcher or in another position a trucking company.
2. Flexibility: Why is it important for the factor to understand your business? Imagine working with someone who just does not understand why you can’t file your paperwork on a regimented schedule. Meanwhile, you’re out on the road, or managing drivers. Directly or indirectly, you are battling bad weather, construction, traffic snarls and the everyday manic life of a trucker. When you finally have time to file paperwork it's the weekend. Is your factor available outside regular office hours? You need a 24/7 online presence, at minimum.
3. Accreditation: One of the first questions you ought to ask any factor is whether they’re a member of the International Factoring Association. The IFA has been around since 1998, and while it’s not a legislative body, it has expelled members that the association didn’t feel were conducting their business forthrightly and dealing honestly with their clients. You could also ask if they’re a member of the Commercial Finance Association, also founded in 1998, and similar in its membership and responsible business dealings strictures.
4. Terms and Conditions: Be sure you understand every sentence and clause in your contract. Have an attorney go over the contract with you before you sign. This point can’t be emphasized enough, because pretending you understand something in a written contract when you don’t can be the undoing of your trucking company. Check the contract you’re offered very carefully for minimum sales requirements, the length of the contract, whether the factor is ‘recourse’ or ‘non-recourse.’ Be sure to understand how, and under what conditions, you may be allowed to terminate the contract in the future.
a. Minimums and Rates: You always hear that some factors won’t take your trucking company as a client if you don’t turn a certain amount of receivables annually. The best way to find that out is to call several factors and ask about their annual sales requirements. Some factors won’t talk to your company unless your annual sales are $250,000 and up, while others who’ve been in the business for over a hundred years will provide funding for businesses with half that amount. Do your homework. There are factors who insist that you place every receivable with them for factoring, and others who do not have such a requirement. You will want to know that before signing the contract.
b. Additional Charges: While you’ve got them on the phone, be sure to ask about finance charges and service charges that might be assessed. A factor's fees may be higher than a bank's for the same services, but you may not find a bank that's willing to lend you money, especially if your company is new and has a limited credit history. Select a factor carefully and adjust your business plan to include the added fees as part of your overhead, or the cost of doing business.
5. Plan in Advance: Don’t wait to find a factor until your trucking company needs money within a day or two. Many small motor carriers come to grief when the need for cash is urgent. A business owner who is in a hurry can make assumptions or mistakes that could prove costly in the long run. Take time to compare several factors, their contract terms and services, so you don't make an expensive mistake.
Consider the research you need to do before signing with any factor as a kind of prenuptial agreement. Remind yourself -- before you say “I do” to the factor’s contract -- that you should know and understand the terms of your agreement. A little research can prevent a bitter ‘divorce’ between your two companies. Champagne, anyone?
Steve Hausman is CEO of Advance Business Capital, a longtime DAT affiliate. For more information on the joint program visit www.loadfunding.com or call 866-638-8700.