Factoring: Beware of the fine print

July 7, 2023

Land Line Staff

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For some truckers, factoring is just a part of their business plan. They research the companies, read the contracts carefully and make thoughtful decisions. Others who are needing a quick infusion of cash, might not be that careful or take enough time to really know what they are getting themselves into.

For those who may not know, factoring is basically an agreement between your company and a factoring company that provides you with cash advances in exchange for your company’s invoices or accounts receivable.

The factoring company will charge a factoring fee, which is usually around 2-5% and upward, depending on the specific company. Some factoring companies will also add a service charge and/or interest based on how long it takes the customer to pay the invoice. Make sure you know the fee structure before you sign the agreement.

The Business Services Department at the Owner-Operator Independent Drivers Association has recently been fielding a number of calls regarding factoring contracts – and the fact that ELD authorizations and waiver wording is popping up.

For example from the TAFS, Inc. contract:

“The undersigned client (“Client”) of TAFS, Inc., a Kansas corporation (“TAFS”), utilizes an electronic logging device (ELD) to keep records of duty service as required by the Federal Motor Carrier Safety Administration. As a material condition of doing business with TAFS, Client hereby expressly authorizes its current and future ELD provider(s) to grant TAFS unlimited access to all data recorded through Client’s ELD system, including, but not limited to, location data for Client’s equipment, and expressly consents to the transfer to and use by TAFS of all such data. Client hereby waives and releases and forever discharges TAFS and its ELD provider(s), and their respective employees, agents, affiliates, successors and assigns, of and from any and all claims, demands, counterclaims, liabilities, obligations, suits or causes of action of any kind or nature whatsoever arising from or related to the access, transfer and/or use as authorized hereunder.”

 

So what could happen if you refuse to share your ELD data after signing a contract saying you would? Instead of getting paid quickly with the standard deductions, you could be forced to wait until the factoring company gets paid, which defeats the purpose of factoring invoices to begin with.

Power of attorney

Another key piece of contract language to watch for is anything that gives the factoring company power of attorney over your business.

The language can range from very limited to extremely far-reaching in scope. Back to the TAFS factoring agreement, as an example. The company’s contract includes an extensive list of business dealings that TAFS can conduct on behalf of the trucking company. It includes dealing with insurance claims, directing where and how payments are made, suing for collections (on your dime), etc.

Be mindful that when you sign over power of attorney you are limiting your ability to make your own business decisions.

Again, OOIDA cautions that every clause in these factoring contracts be gone over with a fine-tooth comb by someone familiar with the pitfalls of contract language.

OOIDA warns that similar language like the two examples above could be incorporated into contracts from other factoring companies and all contracts should undergo a thorough review.

Breaking up is hard to do

Some factoring agreements include minimum volume terms that could cost you thousands of dollars in fees that weren’t really considered an issue until you decided to part ways with the factoring company.

If your company was invoicing for $15,000 a month when you entered the factoring agreement and later dropped to half that volume, the factoring company is sure to have kept track of the fees it lost because of the downturn. Now that you’ve decided to terminate, the reduction in fees becomes a real problem that could translate into substantial costs for you. Be clear about minimum volume requirements prior to signing the agreement.

You could face other problems when terminating a factoring agreement. Although they’re not common practice among reputable factoring companies, you should still be aware of them.

Some factoring companies require at least a year’s commitment, and they may also have agreements that include automatic renewal provisions unless you give them a specified amount of notice. These agreements may also include early termination penalties.

It’s very important that you know of these provisions before you sign the contract. Some unscrupulous factoring companies have charged extremely unreasonable termination penalties and have also required lengthy notice of termination. This could cost you big.

For example, consider this scenario: When you decided to factor with your current factoring company, they filed a public document informing all interested parties that it has rights to your invoices as collateral for the advances it makes to you as per the agreement. This is normal procedure. The document is called a UCC Financing Statement or UCC-1, and is filed in the public location(s) dictated by the laws of the individual state(s) where you do business. UCC (Universal Commercial Code) refers to the collection of laws dealing with commercial business.

Let’s say that your current factoring company can no longer meet your needs – or the rates are too high. You want to terminate and switch to a new factoring company. However, as long as this UCC-1 filing is in place, it’s difficult, and sometimes impossible, for another company to take over your factoring needs.

If the original factoring agreement requires a lengthy notice of termination – sometimes as much as 120 days or more – the UCC-1 filing won’t be released until that time has passed. LL