Factoring Contracts and Agreements
Because factoring companies put forth a substantial amount of effort and take on risk with every customer they sign on, more times than not contracts are required for all factoring transactions. Typical contracts are annual, semi-annual or even monthly. While these agreements are commonplace in all such industries, before you sign on the dotted line you should know and understand the necessary elements of a factoring contract.
- Fees and payment terms – For obvious reasons, this is an important part of accounts receivable financing. Be sure that the initial payment percentage, any setup fees, the discount rate, and timelines for the final payment on your accounts receivables are outlined within the agreement.
- Collateral – While your invoices are technically considered collateral, in some cases a factoring company may require additional security in the form of a lien against your company’s assets to protect them in the event of non-payment from your clients.
- Miscellaneous – Other common entries in a factoring agreement include clauses that protect the factor. Usually repayment terms for fraud and non-payment by your clients will require out-of-pocket reimbursement to the factor or giving up additional invoices to satisfy the money that the factor is due.
A few other things to consider when you are looking over your business factoring agreement:
- Be on the lookout for ambiguous language or previously undisclosed fees – Contracts outline the details and requirements of the factoring process in much more detail than speaking with a factor does. If you see fees or terminology that you do not understand, ask the factor about them.
- Require minimum/maximum invoice count in writing – If a factor requires a pre-determined minimum or maximum number of invoices in order to process your invoices, be sure that these numbers are included in the agreement before signing it.
- If possible, have the contract looked over by a lawyer – Because a factoring service can tie up a significant portion of your business’ monthly accounts receivables, if not an entire month’s worth, it is highly recommended that you have a lawyer go over the factoring contract before you lock yourself into the agreement.