A factoring agreement is a legal document typically between two entities.

• A factoring company, and 

• a commercial entity. 

The purpose of the factoring agreement is to describe the legal relationship between a factoring company and its customer.

The following is a summary of the most important things we think are in a factoring contract. 

Please understand that what follows is for informational purposes only and is not intended to take the place of competent counsel. Before signing any legal document, you must obtain advice from a lawyer with specific experience in the field for the document you are planning to sign.

Fees and charges - There should be a section in the agreement that describes the fees that will be charged. If it turns out that not all of the charges are in one section of the document search with your word processing software for words like "interest", "fees", "charges", "minimum", "collection" etc. This should bring up all applicable fees and charges. In addition, I would also suggest asking your sales person at the factoring company to send you an email with all the charges you will be assessed.  

Generally you will be charged an amount based on the time it takes your customer to pay. This can be described as an interest rate or a discount percentage. If a discount amount is charged it will be best to understand the cost as the inverse of the rebate. As an example, if the amount of your rebate is 18%, you will be charged 2%. One important thing to note is that most factors access a monthly minimum. This means that if you do not factor invoices in a month to cover the minimum you will be charged the difference between the amount that you factor and the minimum.

You may also be charged a "factoring commission" on the face amount of the invoice factored and an interest rate on the advances that the factor makes.  
The factoring agreement may also include things like collection days.  This charge typically will add interest days to the amount of your fees.  If your customer pays on the 30th day from purchase, 3 collection days will have the affect of extending your charges as if the invoice was collected on the 33rd day.

When comparing different quotes from different companies it is important that you compare, apples to apples.  This may be a little tedious but in the long run it will be worth it.  You should build a spread sheet with the different offers you have from different factors and compare them to each other under different scenarios.

Security interest - There will be a section in the agreement that outlines the collateral that the factoring company will have.  It is not unusual for factors to take an all asset lien on your company but you may find a factor that is willing to take a lien on your cash and receivables only.  

Guaranty - Most likely you will be asked to personally guarantee advance that the factoring company makes to your company.  Even factoring facilities described as "non-recourse" will most likely have a guaranty provision in that the factoring company will only take the financial risk of your customers.  If the invoice are not paid for a reason like, commercial dispute you will be personally liable for the advances. 

Advance Rates - The Advance percentage is likely to be included in your contract as an "up to" rate.  typical "up to" language would be something like "factor will offer advances on the accounts receivable at a rate equal to "up to" 80%".   Factors are discretionary lenders.  As compared to a real estate loan factors are not required to advance and may choose not to advance if they see a certain decline in the purchased receivables.

Ineligible - Under their power of discretion as described above, factors can deem specific invoices or entire customers of their factored client ineligible. Normal ineligible accounts include foreign customers, customers that are past due and customers that represent a high concentration of your receivables.

Power of Attorney - All factoring agreements give the factor your company's limited power of attorney to act on your behalf regarding your accounts. This power includes the authority to endorse checks and to resolve complaints from customers on your behalf.  These powers are rarely used but you should be aware of them.

Reports - Your factor may require monthly reports from you. This could include monthly financial statements, accounts payable aging reports, customer lists, etc. Make sure you know exactly what the information requirements are and when they are due so you wont incur late fees if they are not produced on time.

This is obviously too much to cover in one blog post so in addition to this summary we will be generating a series of articles in the future that will cover each section of the factoring agreement, one at a time.

Remember, this is just a short summary for informational purposes only.  Get a lawyer and listen to their advice.