You need to check the agreement provides you with a sufficient upfront payment for each invoice you factor. However, the whole purpose of invoice finance is to release your working capital. The remainder will be paid out (minus fees) once the customer has paid up. It will set out what percentage of each invoice’s value your business can expect to get upon sale. Factoring service agreement: Related parties need to have a written factoring service agreement detailing the type of services the factor provides. You may therefore need to consent to the factoring company’s vetting of your customers in order to reach an agreement.Īdvance Amount: This is arguably the most important element of a factoring agreement. In this case you may choose which invoices to sell.Ĭreditworthiness: Finance companies will generally look at the relative creditworthiness of both your business and its customers when deciding whether to approve your application for invoice factoring, Alternatively, you may choose selective factoring. It will also confirm whether your agreement involves all your invoices. Factoring allows a company to sell off its receivables at one time rather than having to wait on collecting from customers. Selling Accounts Receivable: Every factoring agreement will cover which invoices you will be selling. So, whilst your factoring agreement may contain bespoke terms, it’s worth looking out for the common provisions listed below. Factoring agreements with and without ‘recourse’ are available, with the non-recourse option involving higher fees due to the lender’s increased risk which is mitigated by a credit insurance policy.Many finance companies use a fairly simple factoring agreement template that covers off similar terms. Something else to watch out for is whether or not you become liable should a customer fail to pay. A third party’s involvement in the debt collection process could destroy an otherwise impeccable reputation in the eyes of a customer. For example, you may wish to keep the fact that you are borrowing money against customer debt confidential, in which case the lender’s name will not be included on your invoices.Ĭonfidentiality is an important issue when a company’s unique selling point is based on excellent customer communication and care. Specific types of contractįactoring and invoice discounting agreements are often tailor-made to each company, and its objectives. This is because their risk is largely based on the credit-worthiness of your customers, and if there is any doubt about their ability or willingness to repay, you may be asked to provide the backing of an asset. In some cases, financiers require collateral before they will lend. Some of the language used in this market can be ambiguous or unclear, and it is often only those with experience in this particular type of finance who are able to quickly decipher the small print. Of course, lenders aren’t allowed to hide fees and charges, but they don’t always make them stand out in their contracts either. Some companies offer a free trial, but if yours doesn’t, you’ll need to know the minimum term and notice period required should you wish to end the arrangement.īeing charged ‘hidden’ fees is a common complaint from business owners who haven’t checked the small print. Length of contract and notice period for exitįactoring contracts are generally long-term, and can be difficult to exit without detailed planning. The team are available now - 08 What constitutes a factoring agreement? No matter what position you are in and need looking for options, speak to a member of the Real Business Rescue team. Don't Worry - There are thousands of other company directors going through the same process.
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