Note: This blog highlights some common sales and marketing practices in freight factoring. The contents are for educational purposes only. Like any business contract, it’s important that you ask questions before signing or applying for services.
Imagine this: you sign an agreement with a factoring company that appears to offer a great rate.
You start submitting invoices and quickly discover that the true cost of factoring your freight invoices is much higher than what you thought you had agreed to.
Now you’re trapped in the factoring agreement for a year – or more, in some cases – or you end up paying thousands of dollars in early termination fees for prematurely ending the contract.
This scenario is far too common in the factoring industry. Like any business, not all factoring companies operate this way. It’s important you have the right information to make an informed decision – before getting stuck in a factoring contract.
When choosing the right factoring company, there are steps you can take to avoid too-good-to-be-true factoring agreements. In this blog, we outline some of the industry’s most unethical practices, and how you can avoid them.
The Bait and Switch: Deceptive Rate Practices
If you’re not familiar with the term, “bait and switch,” it refers, in this case, to the practice of offering a low initial rate or cost only to find out that you’re committed to a much higher rate, additional fees, and/or hidden charges after a not well-advertised introductory period.
The following is an example of how factoring companies offering “low introductory rates” may get you to pay more in the long run. The numbers are for example purposes only.
- You’re contacted by a factoring company offering a super low, introductory rate of 1 percent.
- You sign the contract with the company thinking you’re going to save money on factoring fees.
- After you’re locked into the contract and your introductory rate has expired, you’re faced with a much higher rate than was advertised.
- You may also pay additional fees for invoice processing. When you total the fees, you may be paying as much or more than other rate quotes. It’s important to consider these added costs when making a decision. Just looking at that rate prevents you from understanding the total cost to your business.
It’s important to understand the contract that you sign with a factoring company and to go over it with a fine-tooth comb before signing. It stands to reason that if you’re offered a super low rate initially, there may be additional fees being charged, or there is a rate hike after the introductory period expires
Before signing a contract with a factoring company, ask about any additional processing or invoice fees. Then, calculate how much you will pay in those fees over the entire length of the year or contract. You’ll likely find that low introductory rates end up being what you were paying before or even more expensive. That low factoring rate may not end up saving you any money in the long term.
Hidden Fee Structures
When considering a factoring company, these are some of the most common types of hidden fees you may encounter:
Minimum Volume Requirements and Penalties
To maintain a low factoring rate, you may have to reach or maintain a minimum monthly factoring volume. It may be difficult to meet minimum volume requirements, especially if you’re a small fleet or owner operator. If you don’t meet the volume requirements, you’ll be charged a penalty fee or a higher factoring rate. You may want to do this if it means a lower rate, but it’s important that you know the risk if the minimums aren’t met.
Fuel Card Usage Penalties
Many factoring companies offer fuel card programs alongside factoring to help you manage fuel costs. Some companies can charge you additional fees for not meeting minimum fuel purchase thresholds or may penalize you if your fuel card isn’t used frequently.
Per-Invoice Processing Fees
Some factoring companies may charge a per-invoice processing fee. These fees are on top of your factoring rate. Factoring companies often use these fees to compensate for offering a low factoring rate.
ACH & Wire Fees
Most factoring companies charge a nominal amount to fund your bank account. It’s common for wires to cost more because of the speed required. Still, many factoring companies raise the cost of these funding methods. Again, when added up over time, these additional and higher-than-average fees, eat away at those savings you thought you were getting with your rate.
All these hidden fees impact your profitability.
Spotting the Red Flags in Factoring Advertising
If a factoring company is advertising “rates as low as 1%” without explaining the details, that’s a red flag. Often, those teaser rates come with strings attached—like volume requirements or hidden fees. Watch out for vague terms like “custom pricing” or “limited time offers” that don’t clearly outline what you’re actually paying.
Another warning sign? High-pressure sales tactics like “sign up today to lock in your rate.” That kind of urgency is designed to keep you from reading the fine print.
Falling for these tricks can cost you more than money—it can cost you time, growth, and peace of mind. Asking the right questions and doing your homework can help you avoid these traps.
What to ask before signing a factoring contract
Hidden fees compound over time and can even make the cost of factoring more expensive. Use the following checklist to drive your conversations with any factoring company you’re considering before signing a contract:
- Do you have minimum volume requirements? If so, what is the minimum required and what is the penalty for not meeting it?
- Do you charge fuel card usage penalties? If so, how are these fuel fees calculated?
- Do you charge processing, ACH, or wire transfer fees? If so, how much will I be charged on each transaction?
- Do you charge a per-invoice processing fee in addition to the factoring rate?
Stay informed
These fees aren’t just frustrating; they take away your power to make a smart decision when picking a factoring company. The good news? You can protect yourself by reading the fine print, asking direct questions and comparing multiple factoring partners before signing anything. Knowledge is power, and the more you understand your options, the better equipped you are to keep your business in control.
If you’d like a Triumph expert to help make sense of a contract, reach out here.