Everything You Need to Know About a Letter of Release in Trucking

trucker leaning against semi truck while looking at paperwork

Last Updated June 24, 2024

Freight factoring is a common form of financing for trucking business owners who need quick funding. It’s a common practice to provide cash flow so truckers can keep hauling goods.

If you’re a carrier interested in pursuing freight factoring, you need to first understand the full scope of factoring terms to prevent confusion or disagreements down the line. One important aspect of any standard factoring agreement is a letter of release.

In this article, we’ll provide everything you need to know about a letter of release in trucking.

Understanding a Notice of Assignment

Before learning about release letters, it’s necessary to have an understanding of a notice of assignment.

A notice of assignment (NOA) is an important document in the trucking industry, especially when dealing with factoring companies. Legally, it serves as a formal notification that a creditor has assigned their right to collect debts to another party, typically a factoring company. This notice informs all relevant parties, including customers, that payments must be made to the factoring company instead of the original creditor (the trucking company).

The primary purpose of the NOA in trucking is to ensure transparency in transactions with accounts receivables. When a trucking company factors its invoices, the factoring company buys these invoices at a discounted rate, providing the trucking company with immediate cash flow. The NOA then legally binds the clients to redirect their payments directly to the factoring firm, which protects the financial interests of all parties involved. This process helps maintain a clear record of payment liabilities and prevents payment disputes which are common in high-volume transaction industries like trucking.

However, issuing and managing NOAs can sometimes lead to complications, such as delays in notifying clients which may result in payments sent to the wrong entity. To mitigate such issues, the factoring company and the trucking business must coordinate closely. It’s about timely and clear communication with clients about the change in payment details. Addressing these concerns proactively can prevent financial discrepancies and foster trust among all parties involved.

What Is a Letter of Release From a Factoring Company?

A letter of release from a factoring company is an official document that signifies the termination of a factoring agreement between the factoring company and its client. This letter confirms that the trucking company has fulfilled all its obligations under the factoring agreement, such as settling any outstanding invoices or completing all contractual terms.

By issuing this letter, the factoring company officially releases the trucking company from any further responsibilities related to the financed invoices. This allows the trucking company to regain full control over its receivables and future invoices. It provides a clear path for businesses to pursue other financial arrangements or revert to direct client invoicing.

Related: How to Switch Factoring Companies

What to Look Out for When Reading the Terms and Conditions of a Factoring Agreement

A factoring agreement is binding and can significantly affect your trucking company’s financial health. When engaging, understanding every aspect of the contract will help you manage your cash flow effectively and avoid any unexpected obligations.

Here are some key points to consider:

  • Fees and Rates: Look for detailed information on the factoring fees you will be charged, including service fees, interest rates, and any additional circumstantial costs.
  • Advance Rates: Understand what percentage of your invoice value will be paid upfront by the factoring company.
  • Recourse vs. Non-Recourse: In a recourse agreement, you must buy back unpaid invoices from the factoring company, whereas in non-recourse, the factoring company assumes the risk of non-payment.
  • Term of Agreement: Check the duration of the factoring agreement and understand the conditions under which it can be renewed or terminated.
  • Notification Requirement: Be aware of any requirements to notify your clients about the factoring arrangement.
  • Monthly Minimums: Some factoring companies require a minimum volume of invoices per month.

Know these details to better safeguard your business against unforeseen debts and maintain a healthier financial operation.

Letter of Release FAQs

How do you terminate a factoring agreement?

Review the terms specified in your contract regarding cancellation. Typically, this involves notifying the factoring company in writing within a specified notice period, often 30 to 90 days. Make sure all outstanding invoices are settled and follow any specific procedures the agreement outlines for a smooth termination process.

How do you switch freight factoring companies?

Start by examining your current agreement for any clauses related to transitioning to another service. Once you understand the terms, settle any outstanding obligations, and obtain a letter of release from your current factoring company. Then, you can safely enter into a new agreement with another company without legal repercussions. You cannot have more than one factoring company at a time.

Who provides a letter of release?

The factoring company provides a letter of release once the trucking company has fulfilled all obligations under the factoring agreement. This document marks the end of the business relationship between the trucking company and the factoring company, and it must be issued before the trucking company can engage with another factoring service or revert to handling its receivables independently.