An estoppel letter (or estoppel certificate) is a signed statement confirming specific facts. Because another party relies on those facts, the signer is generally "estopped," or barred, from later asserting something different.
How it works in factoring
Estoppel letters show up in two main factoring situations:
From the customer (account debtor). A factor may ask a large customer to confirm in writing that:
- It received the notice of assignment and will pay the factor
- Specific invoices are valid and owed in stated amounts
- It has no known defenses, offsets or counterclaims against those invoices
This is especially useful for large invoices or new customer relationships. If the customer later tries to withhold payment over a defense it said it did not have, the letter helps the factor.
From the existing financier. When a business moves to a new factor or lender, the new financier may want the old one to confirm the balance owed, that no other defaults exist, and that it will release its lien on payment. This overlaps with a payoff letter, and the two are sometimes combined.
What to check
- Exactly what is being confirmed; a customer should not sign a statement that understates real disputes
- Whether the letter is limited to listed invoices or covers future ones too
- Who at the customer has authority to sign
Estoppel letters are not required in every deal. They tend to appear where invoice size, customer concentration or a refinancing makes certainty especially valuable.