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Factoring Transportation Accounts
by David Jencks, P.S.
Ed. Note. If you’re considering factoring transportation receivables, here are some rules and guidelines to be sure to
follow. Attorney David Jencks’ legal practice specializes in assisting small factors and includes those who focus on transportation clients.
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Factoring transportation accounts is an area of the Factoring industry that is unique in many aspects, including the type of
paper in the industry, contractual and legal issues, the type of fraud and losses that occur, and the operations of verification and proper funding.
The Paper of Transportation
Transportation paper usually consists of an itemized invoice listing the Carrier’s charges and deductions, the Rate
Confirmation Sheet, and Bill of Lading, and a Broker/Carrier Agreement when a Broker is involved in the arranging of loads.
A Factor should receive from, or create for, its client an itemized invoice that must include the “Bill To” party (which is
typically a Freight Broker) and the “Ship To” party (which is usually the Consignee). Itemized terms will include the agreed upon rate to haul the freight, advance amounts taken upon accepting the load, and all
other charges and/or deductions that can include unloading fees, tolls, tarps and pallet exchanges.
A critical issue in transportation factoring is to make sure the Factor receives an original Bill of Lading. A Bill of Lading
serves as the receipt for the goods issued by the person contracted to transport and deliver them to a specified person or place. It should state the name of the party from whom goods are received, the place of
delivery, a description of the goods, and the terms of the contract to transport them. The Bill of Lading may be considered the most important piece of paper when it comes to collecting on freight invoices. The Bill
of Lading must be carefully inspected by the Factor before funding the corresponding invoice to identify any damages, shortages, late delivery, unloading fees, pallet exchanges, and other charges and potential
offsets. A review of the Bill of Lading helps prevent erroneous funding on the gross invoice amount and helps the Factor fund on the actual value of the invoice.
A Rate Confirmation Sheet is the agreement, on a per load basis, between the Freight Broker and Carrier. Critical data to note
on the Rate Confirmation Sheet is the pick up and delivery times and dates, the rate being paid to the Carrier (per mile or a flat rate are most common), how many drops (the number of deliveries to deliver the
load), the address where the invoice is to be sent, payment terms and any special instructions or requirements (for example, a 48 foot trailer vs. a 53 foot, a team of drivers required, straps and tarps necessary,
pallets necessary, etc.) that may apply.
A Broker/Carrier Agreement also exists in the transportation industry. Its importance depends on whether it controls the
payment terms for the Carrier to haul and the Broker to pay for the loads. Some of these contracts simply refer to the Rate Confirmation and Bill of Lading for payment terms whereas some incorporate actual payment
terms into the contract. I suggest that each Transportation Factoring Contract have a simple clause requiring the client to produce it to the Factor upon your request with failure to do so constituting a material
breach of the agreement. UCC 9-404 makes clear that the Factor will take subject to any provisions in the Broker/Carrier Agreement. Therefore, when your client wishes to take a brokered load, you can receive a copy
of the contract and make credit and funding decisions based on those terms which you will take subject to. As any transportation Factor can tell you, most of your clients will haul through Brokers, and therefore, it
is important to understand those rules and underlying agreements your Carrier has with them.
Transportation Factors should keep a close eye on the State and Federal Compliance Regulations that apply to a for-hire, over
the road Carrier. The Federal Motor Carrier Safety Administration requires that Carriers have operating authority. This is the actual operating permit that is granted to the Carrier by the FMCSA. This document will
state the legal name of the Carrier and the number assigned to it. In the application process, the Factor should require a copy of the operating authority. Failure to do so can result in losses to the Factor. This
happens when the Carrier has its authority to operate revoked, putting the Factor’s client out of business and leaving the Factor with open invoices and no ability to recover through future invoice fundings.
Furthermore, without valid operating authority, both Brokers and Shippers strengthen their argument to not pay, or not pay in full, for delivered loads.
Single State Registration and the International Registration Plan are mandatory filings and licenses that are required to be
properly renewed each year and the Factor should require initial proof of filing at the Close of a deal and monitor, or require the client to show proof of compliance on at least an annual basis.
A copy of the International Fuel Tax Association’s verification that all state required fuel taxes for a Carrier has been
properly filed and paid is also important. The Factor should require proof of the Quarterly filing through its contract with the Client. If fuel taxes are not paid, the Factor’s client could lose its operating
authority and the Factor’s ability to collect on invoices could be impaired.
Legal and Contractual Considerations
Before a transportation factoring deal is done, your contract and associated legal documents should be further modified to
specifically address transportation issues.
A transportation factoring contract should contain a provision requiring that the client produce, on demand, information with
respect to any bond provided by a Broker to the Interstate Commerce Commission under which the Factor may be a claimant. The United States Code, Title 49, Subtitle 4, Part B, Chapter 139 requires that all Freight
Brokers post a bond or other acceptable type of security in order to register and be eligible to broker loads. A factor can and may be a claimant under these instruments. It is the Factor's responsibility to verify
that each Broker billed has a bond or trust fund in place. This information can be derived from a variety of credit reporting services or on the FMCSA website. The Factor should exercise judgment in filing a claim
on the Broker’s Bond or Trust Fund. Typically, the Factor will perform normal collections procedures until the invoice reaches a certain age. Waiting at least 60 days is quite standard but is more so dictated on the
payment terms that the Broker stated on the Rate Confirmation Sheet. Filing on a Bond or Trust Fund is an effective procedure as most Brokers would rather pay an invoice(s) than lose the Bond or Trust Fund.
Frivolous filings against a bond should be avoided, but this action also helps resolve slow or no pays on disputed invoices.
It is also very important in limiting or in helping to prevent fraud that the factoring contract require the Client to produce
an original invoice together with any supporting documentation required for payment by the Customer, which should include but not be necessarily limited to the Original Bill of Lading, a copy of the Rate
Confirmation and the Broker/Carrier Agreement.
One tool I encourage the Factor to implement when closing a transportation factoring deal is an addendum incorporated into the
contract that specifies instructions and requirements dealing with transportation invoices. For instance, the document should require that unloading fees, detention fees, tarp fees, toll fees and others should be
properly documented on the invoice, and in the event that they are not, the Client will either be charged against the reserve deposit, available rebates, or be assessed against future fundings. The addendum should
also explicitly address the issue of a cash advances. Some of my clients allow for one cash advance to be taken but noted on the invoice, others prohibit the taking of any advances. What is essential is that the
Client understands its ability, or lack thereof, to take advances on a load and the importance of noting them on the invoice. The transportation factoring contract should also state that in the event that advances
are not noted or are improperly noted, it will be a material breach of the agreement and those invoices shall be subject to default pricing and/or cancellation of the factoring contract. My clients have reported
success with the document in that the Client tends to take more time in reading and understanding the language, as it is specifically tailored to familiar transportation language and issues. Furthermore, the
addendum tends to be short with no complicated legal language.
Credit Decisions and Underwriting
The size and credit worthiness of each Freight Broker varies tremendously, and the available credit information is
usually found in a much different format and from a uniquely different source than what the Factor may find for a Shipper, using Dun & Bradstreet, for instance. Currently, there are only a handful of credit
reporting agencies that offer recent and useful information for Debtors within the Transportation Industry.
The Factor should pay close attention to the following criteria when establishing credit limits for Freight Brokers: Length of
time in business, bond or trust fund on file with the FMCSA, recent slow pay/no pay complaints on file, average high dollar credit given from reported Carrier references, average reported "days to pay",
and any listed affiliates within the Industry.
A transportation Factor should start out conservatively and increase limits when the Factor is able to establish its own
personal payment trend with the Freight Broker. Concentration with a particular Broker is not only discouraged, but particularly dangerous for both the Carrier and the Factor.
If the Factor finds that the available credit information is lacking, it should not hesitate to require Carrier
references and make those decisions internally. The Factor may find that the Freight Broker's credit history is neither good nor bad. In these cases the Factor may elect to fund "one load only" until a
payment is received, or depending on the dollar amount of the load, the Factor may elect to fund at 50%.
The majority of Freight Brokers are very familiar with transportation Factors and will comply with the rules of the
Assignment. In the event that they do not, and a misdirected payment occurs, the Factor always has the Factor friendly provisions (9-406 and 9-318) of the Uniform Commercial Code dealing with improper payment after
notice of assignment. My clients and I have had success collecting with what I call a “multiple liability warning” letter sent to both the Client and the Account Debtor advising of the misdirected payment problem.
Fraud and Losses in Transportation Factoring
If you are reading this newsletter, you are familiar with fraud in Factoring. Transportation has many of the similar fraud
schemes and loss risks but also contains a few that are unique.
The Client that funds one package of invoices, doesn’t note advances on them, and then disappears is a difficult loss to
control. Transportation clients are notorious for taking additional advances off of invoices even after funding. Verification to the account debtor with the explicit question about advances taken is critical to
reduce losses and prevent over-funding.
The Client who had prior claims on loads that were hauled before they started factoring is another persistent problem in the
industry. Requesting the account debtor, particularly a Broker, to sign a waiver of defenses letter can at least be helpful in establishing your legal recourse when offsets for claims the Factor has no idea existed
begin to affect payments on funded invoices. Brokers are also not at all hesitant to simply put the entire account of a Carrier on hold if prior claims exist. It has been my experience that most transportation
Factors do not find waiver of defenses letters either cost efficient or effective. However, I would recommend them at a minimum on every deal that has high broker concentration and/or large dollar amounts at stake.
The Client who creates multiple invoices and sends them to multiple factors with copies of the Bills of Lading also occurs.
Insistence on the original Bills of Lading before funding will help reduce this sort of fraud loss.
Verification and Operations
Invoice verification does not differ greatly in Transportation from other fields. Other than ensuring your verification
department is comfortable with the industry language and notations that can occur on transportation invoices, multileveled verification in a brokerage can be important. My clients report that often times an invoice
is verified as payable in full, but when it arrives, it does so with offsets. Therefore, an important step in the verification process is to attempt verification in both the accounts payable and dispatch departments
of the Broker or Shipper. Lack of communication from dispatch to accounts payable sometimes means that AP doesn’t know of the pending claims. At a minimum, verification should include asking AP to confirm it has
verified with dispatch that no pending claims exist on the load.
Disputed terms between the Invoice, Rate Confirmation Sheet and Bill of Lading should be resolved prior to funding
transportation invoices and all three documents should be reviewed together to identify potential discrepancies and red flags that can then be investigated.
A well done transportation deal that yields excellent and expected returns requires the receipt of the proper paper, some
modifications to your legal documents, and an analysis of itemized Invoices, Rate Confirmations, and Bills of Lading prior to funding. As we know, Factoring is a specialized type of finance. Those that factor
transportation accounts know that it is a specialty within a specialty. Excellent returns on transportation accounts are possible with the proper office operations and documentation.
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David Jencks is an attorney representing commercial factors throughout the United States. He can be reached at 605-256-0121 or davidjencks@hotmail.com. He wishes to acknowledge and thank Kim Kringen and Lori Gustaf at Assist Financial Services, Inc., a transportation Factor with 20 years of experience
in the industry, for their assistance in preparing this article.
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