For many small carriers and owner-operators, factoring can feel like a lifeline. You deliver a load today, and instead of waiting 30 to 45 days to get paid, your factoring company cuts you a check within 24 hours. Sounds like a no-brainer, right? But what many don’t realize is that the contract you sign with that factoring company could contain landmines that affect your long-term profitability, creditworthiness, and business flexibility.
This article walks you through the fine print of factoring contracts—what to look out for, how to protect your business, and what questions to ask before signing.
What is a Factoring Agreement?
A factoring agreement is a legally binding contract between your company and a third-party factoring company. In this agreement, you essentially sell your unpaid freight invoices to the factoring company in exchange for immediate cash (usually 80% to 95% of the invoice value). The factoring company then collects payment directly from your customer or broker.
But here’s the catch: once you sign that agreement, you’re often locked into specific terms that can be difficult to change or cancel.
Recourse vs. Non-Recourse Factoring
The first major clause you need to understand is whether your contract is recourse or non-recourse:
- Recourse Factoring means if the broker or shipper doesn’t pay the invoice (within the agreed timeframe), you are responsible for paying the factoring company back. This is the most common type of factoring and typically comes with lower fees because the risk is on you.
- Non-Recourse Factoring means the factoring company absorbs the loss if the broker or shipper doesn’t pay—but only under specific circumstances. This often includes credit-approved customers and doesn’t cover disputes (i.e., if there was a cargo claim or a paperwork issue).
Trap Alert: Many companies claim to offer non-recourse factoring but still include language that holds you responsible for disputed invoices, unapproved brokers, or load issues.
Common Hidden Fees
Just like some lease-purchase agreements, factoring contracts often hide extra costs behind friendly terms. Here are a few to watch out for:
- ACH or Wire Transfer Fees – Some charge up to $25 just to send you your own money.
- Invoice Processing Fees – A small fee for every invoice they handle.
- Minimum Volume Fees – If you don’t factor a minimum number of loads or revenue per month, you get hit with a fee.
- Termination Fees – Leaving the contract early? You might owe thousands.
- Reserve Hold Fees – Some companies hold a portion of your money for “risk mitigation” and delay when or if you get it back.
Always ask for a full fee schedule in writing and compare it to your weekly load count and revenue to see what your true cost would be.
Evergreen Clauses and Contract Lock-Ins
One of the most dangerous parts of a factoring agreement is the “evergreen clause”. This automatically renews your contract every 12 months (or other set period) unless you cancel in writing within a specific window (often 30–60 days before the renewal date).
If you miss that window? You’re stuck for another year, and you might be hit with a hefty penalty if you try to leave.
Pro Tip: If your agreement has an evergreen clause, set a reminder on your phone or calendar for 90 days before renewal. That gives you time to review or negotiate.
UCC Filings and How They Affect You
When you sign a factoring agreement, the company may file a UCC-1 lien against your business. This is a public document that shows the factoring company has a legal claim to your receivables.
Why does this matter?
- It can hurt your credit or make it harder to get financing elsewhere.
- If you switch factoring companies, your new provider can’t fund invoices until the UCC is released.
- It signals to others that your receivables are tied up—which might make brokers nervous.
Make sure you understand when and how the UCC lien will be removed if you cancel the contract.
How Factoring Can Impact Your Credit
Most factoring companies don’t directly report to credit bureaus, but their presence on your UCC record and your repayment behavior can influence your business creditworthiness.
- Late payments on chargebacks or reserves can show up in your credit reports.
- Disputes over payments can trigger collections if not handled properly.
Also, banks and lenders reviewing your file will see that you’re factoring, which might indicate cash flow stress.
Not all factoring companies are equal – pick one that helps protect your credit profile, not harm it.
What to Ask Before Signing
Before you ink any deal, ask these questions:
- Is this agreement recourse or non-recourse?
- What fees will I pay (monthly, per load, ACH, wire, etc.)?
- Are there volume minimums?
- How long is the agreement, and does it auto-renew?
- What’s the termination fee?
- When will you file a UCC, and when will it be removed?
- How quickly do I get funded?
- Can I choose which invoices to factor (“spot factoring”)?
- What happens if a broker disputes a load?
- Is your platform tech-enabled with load tracking and customer portals?
You should never feel rushed or pressured to sign a factoring agreement.
Final Thought: Make the Contract Work for You
Factoring isn’t evil. It can be a powerful cash flow tool when used responsibly and with the right provider. But the fine print matters. A bad factoring contract can strip away your profits, tie up your business, and leave you stuck in a corner.
Always read the entire agreement. Ask questions. Get legal help if needed. And remember: if the contract feels confusing or one-sided, it probably is.
The power isn’t in the money you get tomorrow — it’s in keeping control of your business every step of the way.