Invoice funding is one of the best ways to get a positive cash flow going at your transportation company. Business factoring services can be the answer when those unexpected bills pop up, when trucks have to be repaired, or to keep taxes paid. Invoice factoring is one of the best ways to keep things predictable and stable as you grow your business. But not all freight factoring companies are the same. Here are a few things to watch out for as you choose the right invoice funding company, and the right way to avoid being taken in.
- Pay attention to the fine print. A reputable invoice funding service will be more than happy to discuss every aspect of the factoring agreement from the beginning. If you ever run into a company that’s not, get out. Never enter into a factoring arrangement unless you fully understand all the details and can verify that the terms are standard and acceptable. If they hedge or seem to suggest that anything “won’t be an issue,” you should be suspicious.
- Watch out for companies that sit on payments. Just as in any industry, there are always some unscrupulous bad actors. You want to watch out for any company that has gotten a reputation for sitting on payments. This happens when there’s an agreement to deduct a certain amount of your escrowed funds if payment is received after a certain date, typically 30 days after receipt. A shady transportation factoring service will sometimes “forget” to mark a payment as received if it comes in on the 28th or 29th day. By the time they “remember” to mark the payment as paid, the penalty has already come out of your escrow account. If an invoice funding service has been doing this, someone will have noticed and checking up on a company should reveal it.
Avoiding the Shysters
So how can you avoid being taken in by one of these unscrupulous and dishonest companies? Fortunately, it’s easy to find a good invoice factoring company if you apply common sense business practices.
- Always get documentation. You want to get documentation at every step along the way, and a legitimate business will be more than happy to work with you on this. All contracts should be perfectly clear right from the beginning, and if there’s ever any payment that seems off in any way, the service should be able to provide you with documentation of when they marked invoices, when those invoices came in, and precisely when the funds were deposited into their own bank.
- Always ask for referrals. You wouldn’t even hire a plumber unless you had gotten referred by someone who had used the plumber and was satisfied. This goes double for invoice financing. A legitimate company will have plenty of satisfied customers and should be happy to point you to those customers for a referral.
- Never assume, and keep all your own records. Even if you’ve gotten a referral to a great company, it’s always good business practice to never assume that everything is correct and is going well. It’s also smart to keep your own records very carefully. There’s no reason in the world not to randomly call clients and confirm from their payables when payment was sent out. Whatever documentation you have, make copies. Better yet, digitize all of your documentation so that is easy to search, print out, and send to someone if necessary.
- Use invoice funding companies with industry-standard protocols. Even if you’re new to the game, it’s not too difficult to talk to other companies or even search online to find out what kind of practices are standard. For example, a factoring company should use a bank lockbox, never a PO Box. Bank boxes timestamp everything so that there’s no way of hiding when payments arrived and when they were deposited. Legitimate companies will also have fees within a specific range. Freight factoring companies that operate too far outside this range, in either direction, are suspect.
The vast majority of freight factoring companies are ethical and interested in a productive, long-term relationship. Use common sense and smart business practice and you’ll be able to avoid the dishonest ones.