A Factoring Contract is a two party legal document between a factoring company and a business entity. The goal with factoring contracts is to outline the legal relationship between a factoring company and its client.
The following will be a summary of the most important issues in a factoring contract.
Please understand that the following is for informational purposes only and is not meant to take the place of competent legal counsel. Before signing any legal document you should get the advice of a lawyer with specific experience in the area that relates to the document that you are considering signing.
- Charges and Fees - There should be a section in the agreement that outlines what exactly the feels you will be charged. If it appears that it is all not in one section search the document for terms like "interest", "charges", "fee", "minimum" etc. This should bring up all the applicable charges for your account. In general you will be charged an amount based on how long it takes your customer to pay. This may be described as an interest rate, or rebate amount. If it is a rebate amount understand that the fee will be the inverse of the rebate percentage. If your rebate amount if 18% you will be being charged 2%. The most important thing to be aware of is that most factors charge a monthly minimum. That means that if you don't factor enough invoices in a given month to cover the minimum you will be charged the difference between the amount you did factor and the minimum. Be aware of wire fees, maintenance fees, collateral management fees, and audit fees. When trying to calculate your total cost of factoring make sure to add all the these as part of your cost. They can be more than the interest rate or rebate amount.
- Security Interest - The finance company that you will be dealing with will be taking a security interest in your business. It will either be a lien on your receivables and the proceeds of your receivables or an all asset lien. If you don't have any other secured lenders than an all asset lien is not unusual.
- Guaranty - Most likely you will be asked to personally guaranty the advances that the factoring company makes against your receivables. Even in a non-recourse arrangement you will be guaranteeing the amounts advanced if they are not paid for any reason other then the financial inability of your customer.
- Advance Rate - The advance rate will probably be listed in your agreement as an "up to" rate, something like the following "finance may provide advances against your receivables at a rate equal to, up t0 80%. remember, factors are discretionary lenders. Factoring contracts are written so that factors only have to advance at their discretion. Unlike a committed lending agreement factors are never required to advance and may choose to advance less that the amount listed in the factoring contract.
- Ineligible - Because of the discretionary tone of the factoring contract factors are able to make any receivable ineligible that they choose. Try and make the factor be as specific as possible in writing with the criteria they use in making accounts ineligible. Normal ineligible accounts include foriegn customers, customers that are related to your as a factoring client, and past due amounts.
- Endorsement, limited power of attorney - All factoring contracts give the factor your limited power of attorney to act on your behalf as it relates to your receivables. This power will include the power to endorse checks and the power to settle receivables with your customers on your behalf.
- Reporting - Some factors may require monthly reporting from you. This could include monthly financial statements, accounts payable aging reports, customer lists, etc. Make sure you know exactly what the reporting requirements are because you could incur late fees if you don't produce them on time.
Please feel free to contact one of our factoring professionals at 888.833.2286 if you have a more indepth questions about the contract that you are considering signing and feel free to subscribe to our blog for more factoring information.
