Because an invoice factoring company puts forth a substantial amount of effort and takes on risk with every customer they sign on, more often than not, contracts will be required for all factoring transactions. Typical contracts are annual, semi-annual or even monthly. While these agreements are commonplace in such industries, it is important that you understand the necessary elements of a factoring contract before you sign it.
Some important things to pay close attention to are:
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 companys assets to protect them in the event of non-payment from your clients.
Fees and payment terms
For obvious reasons, this is an important part of a factoring contract. Be sure that the initial payment percentage, any setup fees, the discount rate, and timelines for the final payment on your accounts receivable are outlined within the agreement.
Other common entries in a factoring agreement include clauses that protect the factor. Repayment terms for fraud and non-payment by your clients will usually require out-of-pocket reimbursement to the factor, or giving up additional invoices to satisfy the money that the factor is due.
Here are a few other things to consider when you are looking over your factoring agreement:
Require minimum/maximum invoice count in writing
A factor may require a pre-determined minimum or maximum number of invoices in order to process your invoices. If this is that case, be sure that these numbers are included in the agreement before signing it.
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, do not hesitate to ask the factor about them.
If possible, have the contract looked over by a lawyer
Because accounts receivable lending services can tie up a significant portion of your business monthly accounts receivable, if not an entire months worth, it is highly recommended that you have a lawyer go over the factoring contract from the factoring business before you lock yourself into the agreement. Doing so will better help you understand all aspects of your contract and the agreement you are making. It can also help prevent future problems that could be the result of a misunderstanding in the contract agreement.