What to Look for in a Factoring Agreement

Freight factoring is one of the most common financial tools used by independent carriers. At its core, factoring is simple: you sell your unpaid invoices to a factoring company at a small discount, and they pay you right away instead of waiting 30-45 days for the broker or shipper to pay. But the agreement you sign matters more than most carriers realize. Here's what to look for before you commit.

Spot Factoring vs. Contract Factoring

Spot factoring means you choose which invoices to factor on a load-by-load basis. There's typically no long-term commitment. Rates tend to be slightly higher (often 3-5% per invoice), but you maintain complete flexibility. This is a good option if you only need cash flow help occasionally or want to test a factoring company before committing.

Contract factoring requires you to factor all or most of your invoices over a set period — usually 6-12 months. In exchange, you'll typically get a lower rate (1.5-3% per invoice). The trade-off is commitment: early termination fees can be steep, sometimes equal to several months of minimum volume charges.

Recourse vs. Non-Recourse Factoring

This is one of the most important distinctions in any factoring agreement, and it's often misunderstood.

Recourse factoring means that if the broker or shipper doesn't pay the invoice, you're on the hook. The factoring company will come back to you for the money. Most factoring agreements in trucking are recourse. Rates are lower because the factoring company takes on less risk.

Non-recourse factoring means the factoring company assumes the risk of non-payment — but read the fine print. Most non-recourse agreements only cover credit risk (the broker goes bankrupt), not disputes. If the broker disputes the invoice for any reason, you're still responsible. Non-recourse rates are higher, usually 0.5-1.5% more per invoice.

What's a Fair Rate?

Factoring rates for trucking typically range from 1.5% to 5% of the invoice value. Where you fall in that range depends on your monthly volume, credit of your customers, contract length, and whether you're doing spot or contract factoring. As a rule of thumb:

• High volume contract: 1.5-2.5%
• Low volume contract: 2.5-3.5%
• Spot factoring: 3-5%

If a company quotes you more than 5%, be cautious. And always ask whether the rate is flat or if it increases the longer an invoice goes unpaid (tiered pricing).

Hidden Fees to Watch For

The factoring rate isn't the only cost. Many agreements include additional fees that can add up quickly:

• ACH/wire transfer fees: $5-30 per transaction for same-day or next-day funding
• Invoice processing fees: Per-invoice charges on top of the percentage rate
• Monthly minimum fees: Charged if you don't meet a minimum factoring volume
• Early termination fees: The cost of ending a contract before the term is up
• Credit check fees: Charges for checking the credit of new brokers you want to factor with

Questions to Ask Before Signing

Before you sign any factoring agreement, get clear answers to these questions:

1. 1.What is my all-in cost per invoice, including every fee?
2. 2.Is this recourse or non-recourse? What exactly does non-recourse cover?
3. 3.What is the contract length, and what's the early termination fee?
4. 4.How fast will I get funded after submitting an invoice?
5. 5.Is there a monthly minimum volume requirement?
6. 6.What advance rate will I receive (80%? 90%? 95%?)
7. 7.Do you offer fuel card discounts or other carrier perks?