In the trucking industry, it can take a minimum of 30 (or more) days to get paid for your load. Freight Factoring, also called trucking factoring, is a familiar concept that applies to the invoice for any product or service to collect money faster. Essentially, the person who needs to collect money sells the right to collect the money to another party (the factor) at a reduced price and receives it faster.
An associated concept is Quick Pay. It is similar to factoring in that payment is made quicker at a reduced amount. But it is not quite as quick as factoring. With Quick Pay, you typically receive the money within two to five days.
For many Owner-Operators, the ability to get paid quicker through factoring or Quick Pay far outweighs the cost of getting paid less. The speed at which you get paid is often necessary to keep your business afloat. But what happens if you are not satisfied with your current factoring company? This blog outlines how and why to consider switching factors to better meet your business needs.
Why Switch Factoring Companies?
There are many reasons why people consider changing factors. Below are seven common scenarios that might lead you to look into other factoring options:
- Service
Poor service is too expensive, no matter how low the fees. Communication challenges, prompt payment problems, and confusing reports are a few issues that Owner-Operators can experience. Are you working for the factoring company, or is the factoring company working for you?
- Costs
The charges that the factor requires – including additional fees – may be greater than expected and outweigh the benefit of getting paid faster.
- Risk
If you are engaging with recourse factoring, you incur the risk of default - or non-payment - by the shipper or the customer, which requires the Owner-Operator to return any funds already paid to you for that invoice.
- Contract Restrictions
Some factoring companies require that you process all invoices through them, or at least a minimum amount of invoices per month.
- Approvals
You decide who to do business with, but the factor decides what companies they will process invoices for. If there is a disconnect, they may not be willing to work with you for that invoice or at all.
- Contract Renewal
If your current contract is expiring and it's time to renew, you may want to look into other options to simply compare and contrast with your situation.
- Competition
There may be other recommended factoring companies with better rates or services in the marketplace. Or, ones with more flexible contract terms that better align with your business needs.
What to Consider When Thinking About Switching Factoring Companies?
Start with the termination clause in your current contract. That should get you started and provide information on timing and costs. There are likely other parts of the contract to review, but the termination section will provide the basics (such as fees and notifications).
Unless you terminate a contract at the end of the agreed-to term -- and provide the notification at the appropriate time (typically 30 to 90 days prior to the renewal date) -- you can expect cancellation costs.
And, even without cancellation costs, there will be costs to switching active invoices to a new factor, which are detailed below.
Notifications will need to be in writing. The contract will specify what types of notifications (mail or electronic) are acceptable. All important information regarding making a change should be requested and confirmed in writing.
What Does It Cost to Switch Factoring Companies?
Just like most things, there are costs associated with switching factoring companies. The question is not whether there will be costs, but rather, what the costs will be.
There are ways to minimize these costs. The best way to limit costs involves something that occurs long before this point; the terms of the contract you are switching from. The fewer restrictions and penalties when changing, the better. That is a topic to keep in mind and bring up when agreeing to your next contract.
Depending on your contract, you may have some or all of the following fees:
- Buy-out. The fee for moving current invoices to the new factor is often between 1.0% to 1.5%.
- Early termination. The fee to terminate early varies by company, but a flat rate is normal.
- Guaranteed. This is the minimum amount the factor receives from processing the monthly invoices.
- Other. Hopefully, there is nothing in this category, but be aware that sometimes companies will charge additional administrative fees.
Let's look at a hypothetical example. If you had an agreement to process $25,000 per month through a factoring company for one year, with a 3% processing fee, then the factoring company is guaranteed processing fees of at least $750 per month. If you wanted to cancel the contract before the one-year term, the factoring company will require (in most cases) a monthly fee (the guarantee) for the remainder of the contract.
If you cancel three months prior to the end of the term, the guaranteed fee would be $2,250 ($750 x 3). Plus, any early termination fee such as the $1,000 on top.
The existing invoices that the current factor has received but are still open (because the factor has not yet received payment) transfer to the new factor. The current (old) factor may charge the buy-out fee listed above for those transferred invoices. If there were $20,000 in invoices outstanding, and the buy-out fee was 1.25%, the buy-out cost would be $250.
As seen below, these cost to change in this example amounts to $3,500.
Depending on your contract, you may be able to avoid many of the above fees. Not all factoring companies have guarantee amounts and termination fees. Plus, the date of the change impacts the charges. Knowing this can help you better negotiate your new contract, so if you need to change again, you can do so at the lowest possible cost.
How to Begin Switching Factoring Companies?
If you believe that switching factoring companies is right for you, do the financial analysis on the costs of the switch and determine when the timing is most ideal.
Depending on your situation, to minimize the cost of switching, you may decide it makes sense to wait a few months to coincide with the contract termination.
The current factoring company should be able to provide a report on the costs of switching, which may also help them fix any service issues and delay the need to switch.
The new factoring company should be able to help with this analysis. They will work directly with the current factoring company during the transition.
It is not unusual to experience a slight lag in getting paid during the transition. Discuss this on the front end with the new factoring company. A day or two is much different than a week or two. It is always a good idea to get it in writing and ensure clarity and agreement on both sides.
Once you decide to switch, the notification to cancel the old contract will need to be made along with the date to have the new factor handle the invoices. The new factor will work with the old factor to coordinate the transition, including handling the paperwork.
Other relevant articles:
What to Know About Freight Factoring
Factoring vs. Quick Pay - Which is Right for You?
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