8. Forming a Factoring Contract
transactions are almost always governed by contracts that describe the responsibilities of each party. Contracts can be annual, semi-annual, or monthly, or for a specific set of invoices or a certain account. The following should be very clearly stated in the contract:
- Fees and terms – These are the most important aspects of an accounts receivable factoring contract. Make sure the contract details the initial payment percentage, setup fees or costs, the discount rate, and timelines for invoice payments and payment requests.
- Collateral – Some companies require security for the advance in the form of a lien against your company’s assets (even though your invoices will technically count as collateral). This protects the factoring business in the event that your client fails to make payment. Make sure collateral is correctly described and that the process for collecting is spelled out specifically.
- Miscellaneous – Make not of any clauses that protect the factor against fraud or non-payment, for example, if your customer pays you after you have sold the invoice rather than the factor.
Factoring transactions can be risky for your business, too. Make sure to very carefully evaluate any of the following:
- Ambiguous language or non-stated fees – Any contracts should outline the details of your agreement in plain, easily understandable language. Make sure you’re not left open to onerous repayment terms or hidden fees.
- Maximum/minimum invoice counts – Some companies require that a minimum or maximum amount of invoices be assigned. These numbers should be stated in your contract.