Factoring allows you to get paid for sales you have already made. By leveraging your outstanding invoices, you can receive cash up front. This gives you added confidence in your cash flow and helps you facilitate smooth operations. However, like any financing option, a factoring agreement comes with fine print. It’s important that you understand the details, so you can optimize the benefits of this funding alternative.
With that in mind, here are some specifics you should know as you consider a factoring agreement:
Fees
The first topic to understand about your factoring contract: the potential fees involved. This funding options offers you significant benefits. But you do pay for the service. As you determine the right deal for you, look at the costs involved:
- Origination Fee: When you first implement the factoring agreement, you are often called on to deliver an upfront fee.
- Termination Fee: Ending a factoring agreement often involves paying a termination fee. This comes into play if you choose to walk away from the arrangement. The cost is typically computed as a percentage of the factor credit line.
- Monthly/Weekly Fees: Many factoring agreements include regular fees as part of the contract. These are often scheduled in weekly or monthly increments.
Key Terms
As you review your factoring agreement, it’s important that you have industry lingo in mind. Here are a few terms that will likely come into play as you look for the best situation for you:
Invoice Aging Report: This document provides a formal list of your pending invoices, arranging them by the length of time the amount has been outstanding. The invoice aging report doesn’t necessarily play a role in the factoring agreement itself, but it’s a crucial tool in discussions with your perspective funding partner.
Customer Limit: The goal here is to limit the risk coming from any individual customer. A customer limit restricts the amount of the factor credit line that can cover a single source.
Representations and Warranties: To secure factoring, certain basic facts must be true of your company. These are covered in the “representations and warranties” section, including assertions like your company is solvent and that there aren’t any fraudulent accounts in the factoring list.
Recourse and Non-Recourse Factoring: These terms relate to which party in the factoring agreement (you or the funding company) take on the responsibility if an invoice is never paid. Factoring companies often offer separate options on this front (with different cost scales), so you should discuss the possibilities with your funding partner.
Tips to Better Understand Your Factoring Agreement
Once you master the basics of the typical factoring agreement, you need to apply your knowledge to get the best deal for you. Here are some tips that will let you optimize the situation:
Read the Agreement
This may sound absurdly obvious. But that doesn’t mean it’s bad advice.
In a world where complicated terms of service agreements get clicked without a second thought, we’ve grown accustomed to ignoring the fine print. However, your factoring agreement represents a binding contract. Make sure you review the details and understand your obligations.
Weigh Your Options
Every factoring company offers slightly different terms. While the broad strokes remain the same, you should consider which structure works best for you. Also, don’t be afraid to negotiate. Get terms that don’t work for you changed.
Find a Great Partner
Ultimately, your relationship with a funding company goes beyond the details of a factoring agreement. With trust and mutual respect, you can form a long-term partnership that allows you to maximize your flexibility and fuel your further growth.
To find this, you need to locate the best factoring partner for you. A top funding source, like Frontline Funding, can deliver the peace of mind you need.
Contact Frontline today to learn more.
