The Difference Between a Proposal and Factoring Agreement

factoring agreement proposal differences

At Factor Finders, we get a lot of questions about the paperwork involved in starting a factoring relationship. What is this document? Why do you need that? Read on as we break down the most common documents and information required to begin factoring so you can make informed decisions and move through the underwriting process with ease.

First, we consider the difference between a proposal and the factoring agreement.

Factoring Proposal

Like beginning an engagement, receiving a factoring proposal can elicit great excitement about the possibilities. Also like the former, it is no guarantee that the relationship will come to fruition.

After the introductory conversation, many factoring companies will send a proposal that outlines their offer to you. The proposal will include:

  • Factoring rates, or fees – the percentage of each invoice the factor will charge for financing.
  • Factoring advance and reserve rates – the percentage of each invoice they will advance to you and the amount that is held in reserve until the invoice is paid. For example:
    • Advance: 80%
    • Reserve: 20%
  • Additional fees, such as:
    • Application fees
    • Administrative fees
    • Due diligence fees
    • Credit check fees
  • Recourse period – the amount of time an invoice remains open before the factor requires repurchase. If your factoring company offers non-recourse factoring then this will be stated in the proposal.
  • Other benefits of entering into a factoring agreement with the factoring company. The factor will differentiate their program on its merits

A proposal is the first step toward cementing your factoring relationship, and is a preview of the information you can expect the factoring agreement to cover. Before you sign and return the proposal, or indicate acceptance of its terms, read over it carefully and ask for clarification on any points that do not make sense.

Factoring Agreement

Also known as the factoring contract, the factoring agreement is the foundation of your factoring relationship. This contract should specify every provision to which you may have already agreed verbally or by returning a signed proposal.

In addition, the factoring agreement will explicitly detail your legal rights and responsibilities in the factoring relationship. Most importantly, it will outline your agreement to assign your receivables to the factor – that is, to legally grant the factor the right to purchase the invoices and collect amounts due from your clients. Other legal considerations include limits in the factor’s liability, your right to arbitration or legal action, and the factor’s rights to recover from you in the case of default. If there is any collateral due, the contract will also specify those terms.

If your factoring relationship includes a contract term, there will also be provisions covering the length of the term, the renewal process (which may be an automatic renewal unless you specifically terminate the contract), your responsibility to notify the factor of termination, and fees for early termination.

The contract should be formatted so the sections and provisions are clear and easy to find. Compare the terms listed in the contract to your copy of the initial proposal as well as any updated details you may have from conversations with the factor. You will be required to return at least one signed copy of the factoring agreement, and may be required to notarize your signature. Typically, once you have begun factoring the factor will return a counter-signed copy of the agreement for your records.


As with any legal document, read the proposal and factoring agreement carefully before signing. There is some variation in contracts between factoring companies, and your attention will ensure that every party to the agreement is on the same page about how your factoring relationship will go – smoothly.

If you are looking for an invoice factoring company to help with your cash flow needs, contact Factor Finders for expert advice and a same-day competitive quote.