Authored by Phil Cohen
Factoring can be a great solution for meeting your business’s cash flow needs. But before you sign on that dotted line, you need to understand the agreement you’re about to enter into with the factoring company. We’ll help you break it down so you can sign with confidence and navigate this new relationship successfully.
Key Parts of Your Factoring Agreement
The following are the most critical aspects of the factoring contract. Make sure you understand the terms of each section, negotiating them if necessary. That’s the best way to know you’re getting a favorable deal.
Advance Rates
The advance rates are how much of the invoice value you’ll receive upfront. Most factoring companies that we deal with at Factor Finders will advance you up to 90% of the invoice value. You’ll receive the other 10% (minus factoring fees) after your customers pay the factoring company. However, the advance rate can vary, so it’s important to check what the factoring company is offering.
You should also see if there are invoice amount requirements, which could affect your calculations.
Factoring Fees
The factoring fee is what the company charges for factoring services. Factoring fees might be 3-5% of the invoice value, for example; if your invoice value is $10,000 and the factoring fee is 5% monthly, then you’d owe $500, typically monthly, until your customers pay the invoice.
Check your factoring agreement to see whether this fee is charged as a flat rate or as a percentage, and if there is a tiered cost structure. Under a tiered structure, you might pay a 3% upfront fee and then 0.5% monthly after that, for instance.
It’s also really important to find out what other fees might apply, such as hidden fees or unexpected charges that could trip you up later.
Contract Length
It’s very important to understand how long you’re agreeing to work with a particular factoring partner under these terms. It could be one-off, or for months, or even for years; just be sure the contract length fits with your business goals. Many companies prefer to work with factoring companies on an as-needed basis instead of signing lengthy contracts.
Also check whether there are early termination fees or penalties and see what is required of you in the event you want to exit the relationship early, such as a termination notice. Flexibility is usually the most attractive option, so check whether the contract has (or can accommodate) clauses that allow you to adapt to changing needs instead.
Funding Speed
How fast will you receive your cash? Some companies will fund you within 24 hours of signing an agreement, but others could take much longer. Factoring is ideal for providing fast access to cash, so it’s important to be comfortable with the funding speed before you sign.
Recourse vs. Non-Recourse
As you may already know, recourse factoring puts the responsibility of late or missing payments on you, while non-recourse factoring shifts that responsibility to the factoring company. Which option you choose can affect the advance rate, factoring fees, and other aspects of the contract, not to mention your overall liability, so be extra clear on the terms regarding recourse before you sign.
The Bottom Line
You should never sign any contract without knowing what it contains. A factoring agreement is a binding agreement between you and the factoring company, so it’s very important that you understand the details. Once you’re clear on the terms, you can make an informed decision – and access the cash you need for your business.
For added support, consider working with a factoring broker that’s experienced in navigating factoring contracts. At Factor Finders, we can connect you with factoring companies that suit your needs and guide you through the process, too. We pride ourselves on our responsiveness, so you never have to go through it alone.
Contact us to ask about your factoring agreement and get the advice you need to make a wise decision.