A factoring agreement is the master contract between a business and its factor. It sets out how invoices are sold, how much is advanced, what the factor charges, who bears credit risk and how the relationship ends.
How it works in factoring
Most agreements cover the same core topics, though wording varies widely:
- Purchase terms: which invoices are included (selected invoices or the whole ledger) and how they are submitted
- Advance rate and reserve: how much is paid up front and when the rest is released
- Fees: the discount fee structure and any added charges, such as setup, wire, lockbox or monthly minimum fees
- Recourse: whether and when the seller must repurchase unpaid invoices
- Warranties: the seller's promises that invoices are valid, undisputed and not pledged elsewhere
- Security interest: collateral beyond the purchased invoices, supported by a UCC filing
- Guarantees: personal or validity guarantees from owners
- Term and termination: length, automatic renewal, notice periods and early termination fees
- Defaults and remedies: what counts as a default and what the factor can do
What to check
- Every fee, not just the headline rate; ask for a worked example using your invoices
- Automatic renewal clauses and the window for giving notice
- Minimum volume commitments and penalties for falling short
- What happens to reserves and the UCC filing when you leave
- Whether the factor can change advance rates or fees mid-term
Factoring agreements are written by factors and often favor them. Having an attorney or financial adviser read the agreement before signing is a sensible step, particularly for longer terms or larger volumes.