The key to knowing whether or not factoring is for you is to not look at the bottom line small amount of fees you pay to the factoring company but the tremendous opportunity you can avail to improve your profits and your business prospects by using the factoring services. Selling off your unpaid invoices helps you to release funds trapped and make good of what lies ahead in time and every time.
What is a factoring agreement?
Factoring is a completely legal method of obtaining cash in short term and it is availed by most small as well as large enterprises. Since this is not a loan, you do not need to repay this amount back. The factoring agreement helps you to collect a huge chunk of the payments for your post dated invoices. The agreement lays down how much part the factoring company will hold back to pay for its service charges. The agreement also specifies the recourse clause that allows the company to get back the advance paid in installments when the debtor fails to repay the amount of invoice on maturity. If the agreement carries a non-recourse clause then all risks are borne by the factoring company and usually the company charges a higher charge for such agreements.
Details included in the factoring agreement:
Any typical factoring agreement will contain descriptions on all of the following bulleted points:
Purchase of Accounts Receivable
- Appointment as a factor
- Written credit approval
- Written schedules
- Remittances
- Credit limits
- Minimum amounts
Representations and Warranties
- Receivables
- Chargebacks
Purchase Price
- Calculation of purchase price
- Advances
- Reserves
- Overadvances
Commissions and Interests
- Factoring Commission
- Extended Terms
- Minimum Commissions
- Monthly statement and calculation of interest
- Credit balances
Security Interest
- Grant of security interest
- Cooperation
Customer Dispute and Claims:
- Disputes and Claims
- Returned Merchandise
- Credit Memoranda
Fees and Expenses
- Monitoring fees and other expenses
Indemnities
- Indemnification
- Taxes
Termination and Default
- Term
- Defaults
- Continuing Obligations
- Remedies
Miscellaneous
- No Pledge of Credit
- Waivers
- Right of Inspection
- No pledge or sale of receivables
- Organizations and locations
- Financial statements
- Solvency
- Waiver of jury trial
- No waiver of rights
- Notices
- Assignment
Covenants
- Minimum liquidity
- Intercompany distributions
Obtaining business finance is more easily said than done. Going to a bank will be a tedious task that involves supplying them with incessant documents and kills any chances of receiving finance at the right time. Remember that the fees you pay to the factoring company are much lower than what you will need to pay to the bank for availing a loan of the same amount. After all, the factoring agreement only legally allows you to avail what is due to you! You should diligently use this service right from day one to help your business to stay on the front foot always.