Understanding the key terms in a factoring contract is essential for any trucking company considering factoring as a financial solution. By familiarizing yourself with these terms, you can make informed decisions and ensure the contract aligns with your business needs.

Accounts Receivable

Accounts receivable refer to the outstanding invoices or money owed to your trucking company by customers for services provided. In factoring, these invoices are sold to the factoring company in exchange for immediate cash flow. Not all invoices may qualify for factoring; only those that meet specific criteria set by the factoring company are considered eligible.

Maximum Purchase Limit

Maximum Purchase limit amount refers to the dollar value of invoices a Factoring company will purchase and have outstanding for a client at any given point in time. For example, if your purchase limit is $100,000, the factoring company is willing to purchase invoices from you as long as the total value of outstanding invoices is less than or equal to $100,000. If you already have $100,000 in outstanding invoice value, a factoring company may not fund you until some of your outstanding invoices are paid by customers. 

Advance Rate

The advance rate is the percentage of the invoice value that the factoring company advances to you upfront. Typically, advance rates range from 70% to 95% of the invoice value, depending on factors such as your customer’s creditworthiness and industry standards. The remainder of the invoice amount, minus the factoring fee, is paid to you once your customer settles the invoice.

Reserve Rate

A reserve account is a portion of the invoice value held back by the factoring company at the point of advance. This rate will be the inverse of the Advance Rate, so if you have an Advance Rate of 90%, that means your reserve rate is 10%. For factoring companies, the reserve rate serves as a risk mitigation tool as it is the portion of the invoice value that is not advanced to you when you factor an invoice. Once the invoice is paid, this reserve account is used to settle fees and the remaining balance is credited back to you in a rebate.

Maximum Reserve Balance

Most factoring companies will include a Maximum Reserve Balance as part of their term sheet. This reserve balance will generally be between 10-20% off the Maximum Purchase limit and serves as a security blanket for both the factor and the client in case of payment disputes with customers. The reserve balance ensures that the client is not unduly burdened if there is a non-payment by a customer. A higher Reserve Balance should afford factoring companies to charge clients lower factoring fees. 

Factoring Fee

The factoring fee is the cost of using the factoring service, usually calculated as a percentage of the invoice amount. This fee typically ranges from 2% to 5% of the invoice value per 30 days. The exact percentage rate you get is influenced by factors like invoice volume, customer payment terms, and the risk profile of customers you work with. 

Minimum Volume Requirement

Some factoring contracts include a minimum volume commitment, which requires you to factor a certain amount of invoices within a specified time frame. Failing to meet this commitment can result in penalties or fees, so it’s important to understand this term if it’s included in your contract. 

To read about what makes a carrier company a good candidate for factoring, check out our article What do Factoring Companies Look for in a Client? 

Notice of Assignment

A Notice of Assignment (NOA) is a legal document that informs your customers of your agreement with a factoring company. It serves as a formal notification, directing your customers to send payments directly to the factoring company. This legal requirement ensures your customers know where to send payments, avoiding confusion and delays, and legally binds them to pay the factoring company.

Recourse vs. Non-Recourse Factoring

Recourse and non-recourse factoring determine who bears the risk if your customer goes bankrupt before the invoice is paid in full. In recourse factoring, you are responsible for repaying the advance if your customer does not pay the invoice. In contrast, non-recourse factoring shifts this risk to the factoring company, though it usually comes with higher fees. It is important to note that a carrier is only secured from a non-paying customer if that customer files for bankruptcy. If the customer does not file for bankruptcy and still does not pay the invoice, the client would still be liable for that invoice amount, even with non-recourse factoring. 

Termination Clauses

Termination clauses outline the conditions under which you or the factoring company can end the contract. These clauses usually include a notice period, often ranging from 30 to 90 days, and may also specify specific notification and exit requirements for carriers. In addition to this, factoring companies will also define fees for early termination, if a carrier chooses to end their contract outside of the notice period. Most companies might also restrict carriers from factoring additional invoices once they provide notice. Since notice periods are long and carriers are only legally permitted to work with one factoring company at a time, carriers can be stuck for up to 90 days without access to factoring cash flow once they provide notice and before they can start working with another Factoring company.

At ABC Funding, we do not believe in locking up our clients into rigid contracts that prohibit them from leaving. Our contracts are flexible and give carriers the freedom and flexibility to end the contract if our product and service do not meet their needs. To learn more about ABC contracts, check out our unique benefits. 

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Are You Clear on the Terms in Your Factoring Contract?

 If you have any questions or need clarification on any part of a factoring contract, our team is here to guide you through the process. We make it our job to ensure that our clients grasp the specifics of our agreement to ensure mutual success. Don’t let uncertainty hold you back—Contact us today, and let us help you secure the financial support you need to keep your business moving forward. Reach out now to get started!

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