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A factoring agreement is the document that decides what the arrangement actually costs, how long you are committed, and what happens when you want out. The rate you were quoted appears in it, but so do a dozen other provisions that never come up in a sales call. The provisions that cause trouble later are rarely the ones discussed up front. These are the ten terms worth going through line by line before you sign anything.
1. Recourse or non-recourse
This decides which customer credit risks the factor assumes, and it is one of the major drivers of pricing in the document. Non-recourse arrangements commonly cover specified risks such as qualifying customer insolvency rather than every unpaid invoice. The full comparison is in recourse versus non-recourse factoring.
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2. The advance rate and how the reserve is held
Confirm the percentage advanced, the percentage held in reserve, and whether the reserve sits per invoice or across your whole account. An account level reserve ties up more cash than the headline advance rate suggests.
3. How the discount rate steps
A rate quoted per thirty days behaves very differently from one that steps every fifteen or ten. Ask for the fee schedule written out against a sixty and ninety day payment, not just the first period.
4. Minimum volume commitments
Many agreements require a minimum amount factored per month, or a minimum fee whether or not you use the facility. A quiet month then costs money for a service you did not draw on. Check whether the minimum is stated in invoice volume or in fees earned.
5. Term length and automatic renewal
Some agreements run for one or two years, others use shorter terms or month-to-month structures, and many renew automatically unless canceled inside a notice window. The renewal clause is where a facility you meant to leave becomes a facility you are in for another year.
6. The termination notice window
Look for how much notice is required, whether it can only be given in a set period before renewal, and whether an early exit triggers a termination fee. This clause and the renewal clause work together, and reading either alone gives a misleading picture.
7. Notification and customer verification
Many factoring arrangements are notification based, which means your customers are told to pay the factor directly. Confirm what that notice says, who sends it, and how the factor verifies invoices with your customers. If the relationship is sensitive, ask about the verification script before you sign, not after.
A related point catches owners out. Your customer contract may contain a clause prohibiting you from assigning the receivable. Under the Uniform Commercial Code, and subject to statutory exceptions, that clause may be unenforceable against the assignment. Section 9-406 provides that a term in an agreement between an account debtor and an assignor is ineffective to the extent it prohibits, restricts or requires consent to the assignment of an account, as published by the Legal Information Institute. The section carries its own exceptions, including one for health care insurance receivables, and state enactments vary, so treat this as a question for your own counsel rather than a settled answer.
8. Which customers are approved, and concentration limits
The credit assessment centers on your customers rather than on you, and providers may impose concentration limits on how much of your facility any single customer can represent. If one account is most of your revenue, that limit determines how much cash you can actually raise.
9. Personal or validity guarantees
A facility may include a validity guarantee, under which the guarantor warrants that the invoices are genuine and the work was delivered. That is narrower than a full personal guarantee, but it is still a personal obligation. Read the actual definition in your agreement, since the scope varies.
10. The UCC filing and where it sits
A factor will commonly file a financing statement to perfect its interest, depending on the structure. If you already have a secured creditor holding a blanket lien, that creditor may need to subordinate before the facility can start. What the filing means in practice is explained in what is a UCC filing.
What the fee schedule leaves out
Several costs live in the agreement rather than in the rate. Look for application and due diligence charges, invoice processing or upload fees, wire and same day transfer costs, credit checks run on each new customer, monthly account maintenance, and the cost of the UCC filing and the searches that go with it.
Read the misdirected payment clause as well. Once your customers have been notified, any payment that still arrives with you normally has to be forwarded to the factor within a short window, and agreements often attach a penalty rate to funds held beyond it. Businesses that run factored and unfactored receipts through one account are the ones that trip this clause.
One more provision deserves attention if you already hold other finance. Taking a further advance against receivables that are committed elsewhere creates overlapping claims on the same money, and what that does to a business is set out in loan stacking.
Before you sign
Ask for the full agreement and every schedule attached to it, not a term sheet. Ask for the fee schedule run against a realistic payment timeline, and read it next to how invoice factoring works so the mechanics and the pricing line up. Then compare the total against what the same gap would cost through invoice factoring elsewhere or through a facility you already hold.
BusinessCapital.com is a national business financing platform with over $10 billion deployed and an A+ BBB rating, and factoring is one of its seven funding products alongside lines of credit and short term facilities. Whoever you sign with, the document rather than the quote is what governs.
Frequently asked questions
How long is a typical factoring agreement?
Factoring agreements vary. Fixed terms, month-to-month arrangements and spot transactions all exist. Shorter or one-off structures can carry higher per transaction pricing, because setup costs are spread over less volume.
Can I factor with more than one company at once?
Rarely. Many standard agreements contain exclusivity provisions, and the UCC filing gives the factor a claim over the receivables described in it. Overlapping facilities create competing claims to the same invoices.
What is a validity guarantee in a factoring agreement?
Where included, a validity guarantee typically requires the guarantor to warrant that the invoices are genuine, the goods or services were delivered, and the receivables are not subject to undisclosed competing claims. It does not make the guarantor liable for a customer's insolvency, but it does create exposure for misstatement.
Can I get out of a factoring agreement early?
Usually, subject to the notice window and any early termination fee, and after any outstanding advances are settled. The cost of exiting is set by clauses six and five together, so read them before you need them.
Does factoring show up on my business credit report?
The UCC filing is a public record and can be seen by anyone searching your business, including other providers assessing a later application. Whether it appears as debt depends on how the transaction is structured, which is worth asking your accountant.
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