A termination fee is a charge for ending a factoring agreement before its term is over, or without giving the notice the contract requires. It compensates the factor for fees it expected to earn over the rest of the term.
How it works in factoring
Factoring agreements often run for a fixed term, such as a year, and renew automatically unless the client gives written notice within a set window. Ending outside that window can trigger a fee.
Common calculation methods include:
- A flat amount set in the agreement
- A percentage of the factoring line or of average monthly volume
- The minimum monthly fees for each remaining month of the term
- The fees the factor earned over a recent period, multiplied by the months remaining
Illustrative example: An agreement sets an assumed termination fee equal to the client's average monthly fees times the months remaining. If average fees are $1,500 a month and four months remain, the fee is $6,000.
Missing a notice window is a common way businesses get caught. If the agreement renews automatically for another year and the window passed, leaving even a week later could mean paying for most of a year.
What to check
- The term, renewal clause and notice deadline; put the deadline in your calendar
- How the fee is calculated and whether it is capped
- Whether the fee is waived if the factor raises fees or reduces your advance rate
- Whether a new factor or lender might pay off the fee as part of a buyout
Negotiating termination terms before signing is far easier than after.