A minimum volume requirement is a factoring contract term requiring the client to sell at least a certain amount of invoices in each period, such as monthly, quarterly or yearly. If the client falls short, it usually pays a fee on the difference.
How it works in factoring
Factors set up each client with credit checks, UCC filings, account setup and ongoing monitoring. A volume minimum helps ensure the relationship generates enough fees to cover that work.
The shortfall fee is often calculated as if the client had factored the minimum amount:
Illustrative example: An agreement has an assumed $100,000 monthly minimum and an assumed 2% fee. In a slow month the client factors $70,000. The shortfall is $30,000, so the client owes a minimum fee of $600 in addition to the normal fees for the invoices it did factor.
Minimums can appear in several forms:
- A minimum dollar volume per month or year
- A minimum monthly fee, regardless of volume
- An annual minimum reconciled at year end
They are more common in long-term, whole-ledger agreements than in spot factoring.
What to check
- Whether the minimum is measured monthly or annually; an annual minimum is more forgiving of seasonal dips
- How the shortfall fee is calculated
- Whether the minimum continues if the factor declines your invoices or lowers customer credit limits
- How minimums affect early termination fees
Choose a minimum below your realistic slow-month volume. A minimum set at your strongest month can turn a seasonal lull into a fee.