Freight factoring is designed for companies that haul freight but don’t want to wait to get paid on accounts receivable. In exchange, you’ll have to pay a fee. A factor files a UCC financing statement and holds a lien against the collateral, usually a/Rs from hauling freight.
The UCC is key to factoring. But it makes switching factoring companies more difficult. Here’s what it is, why it’s important, how to get out.
A UCC-1 Filing
A UCC-1 filing (often just called a UCC) is a legal document. When a factor files a UCC they’re claiming an interest in an asset, specifically the right to collect money that’s owed to the company (also known as ‘accounts receivable,’ the ‘a/r’). It works like a truck loan: when you take out a loan to buy a truck, the bank takes an interest in the truck by filing a lien against it. The lien says if you don’t pay up on the loan, the bank can repossess the truck.
Technically the UCC is actually filed by the factoring company, sometimes while you are signing onto their paperwork, and sometimes you will never actually see it, but once it has been filed by your factoring company you are legally bound by it until it has been filed for termination.
There can also be a secondary UCC. The company that has the first UCC gets to collect on it first. The second creditor is next in line.
The Uniform Commercial Code behind these filings was adopted in 1952. It provides a broad set of rules for commercial transactions across the country. For trucking it ensures the rules remain the same from state to state.
A filed UCC protects the factoring company’s right to the accounts assigned to it. It also lets the public know who gets to collect, in order to protect the carrier’s money from being contested.
The UCC statement gives them a priority lien on the accounts receivable. That way, when your customer doesn’t pay, the factoring company will be first in line to get paid. No one else can jump ahead of them. It’s a ‘public notification of record.’
Not every carrier out there understands what a factoring contract entails, or that a binding UCC-1 Financing Statement is on their company, or even their personal name. Some just agree to what is a contract, or a whole lot of paperwork to gain an advance.
That’s why it’s crucial to read the contract. That way you’ll know the details of what you’re signing onto. Like with any contract, you will want to thoroughly review the factoring contract to ensure that you fully understand the details of the contract, including how long the contract will run, how the termination of the contract will happen, any form of communication such as log ins for the portal, and termination fees.
Each contract is going to have their own terms. Of course 12 months is popular.
When a contract is due for termination there is a timeline, sometimes a 30 days written notice, sometimes a 60 days written notice, maybe even a 90 days written notice, before the actual termination date. If that notice is not given in time, the contract may then just renew for another year. In some cases it can be much longer.
Some contracts leave room to walk away early for a specified price — $5,000 or $10,000, perhaps. That amount might be negotiable. But you’ll need to clear any outstanding balance before the UCC is canceled and you’re off hook.
UCC Lien Search
If you think there’s a UCC filing on your company but you don’t have access to it, you can perform a lien search, also known as a UCC Lien Search. Research whether a UCC already exists under your company name and your personal name.
Depending on the state the search could be free, or may require a paid subscription. Some states have no charges in order to run these searches, but just require that you create an account with them in order to do so. See which group your state falls into below.
Free:
Alaska Arizona California Colorado Connecticut Florida Idaho Iowa Kentucky Maryland New Mexico New York North Carolina Ohio Oklahoma Oregon Rhode Island Vermont Washington West Virginia
Paid subscription:
Arkansas Delaware Georgia Hawaii Indiana Kansas Louisiana Maine Minnesota Missouri Montana Nebraska Nevada New Hampshire South Dakota Texas Utah Virginia Wisconsin Wyoming
Free basic search, paid detailed records:
Alabama Illinois Massachusetts Michigan Mississippi New Jersey North Dakota Pennsylvania South Carolina Tennessee
In the case of a UCC-1 financing statement being filed on your company and your personal name, you are going to want to see a copy of that UCC-1 Financing Statement. The filing names the creditor, shows the terms of the filing, and lists the collateral covered (a truck, all assets, all receivables).
How Do You Get Out
You discovered that there is a UCC-1 on your company name or your personal name. It has your information and now it is time for you to figure out how it was filed, for how long, and how you can get out of it. It’s your responsibility to dig into the details of the lien you’ve found. Some key questions to ask are: Is the lien still active? Who holds the lien? How much do you owe? Can you get a copy of the contract? How do you get out? You’re owed a thorough answer.
An aging report will let you see how much money you still have outstanding, either owed to you, or owed by you to the factoring company. That report may be requested from your current factor. However, once the aging report has been requested, it is recommended to be reviewed by the new factor.
Send the invoices to the new factor.
Then, manually look at each invoice to determine its collectability (can the invoice be collected?) and what that means for the buyout (how old, lack of signatures, illegible, cut off pages).
Sort collectible from non collectible and talk next steps together.
With a clear picture of where you stand, the next step is deciding how to deal with the balance you owe to the old factor.
Pay the full balance yourself.
Call the old factor and ask them to drop it down.
Have the new factor buy the invoices after the notice period or when you negotiate, and then they try to collect.
The new factor talks to the old factor. That’s the old factor’s cue to sign a Release of Assignment. Only then the new factor can start collecting the invoices. The Release can be coordinated with the UCC cancellation. Ask your new factor for help canceling the UCC.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
