What Is a Factoring Agreement

There are a variety of fees that small businesses can expect when entering into or resilient factoring agreements. It`s important to understand them all and their implications when reviewing a factoring agreement for your business. In addition to the minimum penalties, you need to know what the penalties are if you do not meet certain conditions. Let`s say you have an initial term of one year, but you don`t want to work with that factor after that time of year. One month (30 days) before the expiry of this period, you must inform the factoring company that you are not renewing the contract. The factoring agreement allows the postman to place a lien on certain assets of your business until the invoice is paid in full. The lien may relate to your claims or to the personal property of your business. This may include inventory or intellectual property. In the event of default, the factor excludes the security rights invoked in the factoring agreement. Non-recourse factoring is a type of invoice factoring in which bad debts are not reimbursed to you by the factoring company. The fees are higher than with recourse factoring.

As an example, let`s say your business sells on 30-day payment terms. Most of your debtors pay within 30 days – some may require lawsuits, some may not – while others exceed the limit and require a more persistent effort on your part. That 30-day share of revenue could make up the bulk of your potential cash flow, but you can`t really take advantage of it. Invoice factoring allows you to free up that money almost immediately or at least a large portion of it. You can use that money for: The healthcare industry is a special case where factoring is desperately needed due to the long payment cycles of governments, private insurance companies, and other third-party payers, but is difficult due to HIPAA requirements. For this reason, medical receivables factoring companies have evolved to specifically address this niche. Better chances of survival for your business – Better cash flow gives your business a better chance of survival. Many businesses fail due to low cash flow, and invoice factoring can keep your business healthy, provided you use it wisely. Prepayment is the percentage of an invoice paid in advance by the factoring company. The difference between the face value of the invoice and the imprest rates serves to protect the factors from loss and to ensure that their costs are covered. Once the invoice is paid, the factor returns the difference between the face value, the amount of the advance and the costs to the company in the form of a factoring discount.

[19] The terms of an invoice factoring contract may seem quite overwhelming at first glance, especially since factoring contracts are typically 20 to 30 pages long. Debt factoring is also used as a financial instrument to enable better cash flow control, especially if a company currently has a lot of receivables to manage with different credit terms. A company sells its invoices at a discount to their face value when it calculates that it is better to use the product to support its own growth than if it actually acted as its “customer`s bank”. [14] Therefore, factoring occurs when the return on proceeds invested in production exceeds the costs associated with factoring receivables. Therefore, the trade-off between the return the company earns by investing in production and the cost of using a factor is crucial to determining both the extent to which factoring is used and the amount of cash the company has. Selective factoring is a type of invoice factoring in which single or small batches of invoices are factored as opposed to large amounts or the entire sales backlog. Invoice factoring means the sale of control of all or part of your receivables. It works like this: while the difference between the face value of the invoice and the advance serves as a reserve for a particular invoice, many factors also hold a current reserve account, which serves to further reduce the risk for the factoring company.

This reserve account typically makes up 10-15% of the seller`s line of credit, but not all factoring companies hold reserve accounts. In the first decade of the 21st century, a fundamental political justification for factoring remains that the product is well suited to the needs of innovative and fast-growing companies that are essential for economic growth. [29] A second public policy rationale is that fundamentally good companies are spared the costly and time-consuming controls and difficulties of protecting suppliers, employees and customers from insolvency, or that a source of funding can be provided during the restructuring process of the company so that it can survive and grow. .