The Hidden Cost of Long-Term Factoring Contracts

I talk to a lot of owner-operators and fleet managers who want to switch load factoring companies because they’ve seen our green “check” on a DAT load board and know for sure that Advance Business Capital will factor that load.

Believe me, we’d love to bring them on.

Just this week I spoke with three companies that want to factor with ABC but are stuck in long-term agreements with their current freight factoring company. One would have to pay a $3,000 termination fee to get out of their contract. They can’t afford to leave even though it would mean more control over the loads they can haul and better opportunities to improve their cash flow.

Long Term, High Price

Long-term contracts commit customers to factoring eligible accounts receivable over a given period of time—typically six months or more. In exchange for that commitment, the factor usually agrees to buy the freight bill invoices at a bargain rate.

What carriers don’t realize, until it’s too late, is that “low cost” and “long term” come at a high price.

To keep costs down, the factor might provide none of the value-added services you need—no insurance offering, no fuel advances, and no reliable customer service or online access to your accounts. There may be fees buried in the contract that you have to pay every month whether you factor loads or not. The company may be extremely selective—the freight factoring rate is low, sure, but only because the factoring company refuses to take on any risk.

ABC is one of the few transportation factoring companies that offer month-to-month contracts. We do that for a couple of different reasons.

First, if factoring is not a fit for you, we don’t want you to feel like you’re tied to it.

Second, like a lot of trucking operations, your cash-flow needs might be seasonal or short-term. A long-term obligation doesn’t make good business sense.

Finally, when our employees come to work, we want them to feel they have to earn your business every day.

For legal reasons, every factoring company will ask you to sign a contract. Before you put pen to paper, take time to understand the length of the agreement. Find out whether you’ll be charged a termination fee if you want to end the relationship. If you want the flexibility of a no-term agreement, don’t settle for anything less.