Every factor structures its terms a little differently. The surest way to compare them is to ask each one the same set of questions and get the answers in writing. This checklist works with any factoring company.
Tip: send these questions by email. Written answers are easier to compare and to check against the final agreement.
Questions about cost
Fees and pricing
- What is the fee on each invoice, and is it charged on the full invoice amount or only on the amount advanced?
- Is the fee flat, or does it grow over time? If tiered, what is each tier, and how long is each period?
- Is a partial period charged as a full period?
- Can you show me the total cost on a sample invoice paid in 30, 45 and 60 days?
- What other fees could I pay? Please list setup, due diligence, wire, ACH, service, credit check, lockbox, misdirected payment and termination fees.
- Are any fees charged monthly whether or not I factor?
- Can the fee schedule change during the term? If so, how much notice will I get?
Advance and reserve
- What percentage of each invoice will you advance?
- Can the advance rate change during the term, and under what conditions?
- How much is held in reserve?
- When is the reserve released: invoice by invoice, weekly or monthly?
- Can you hold my reserve to cover other unpaid or disputed invoices?
- What happens to my reserve after I give notice to terminate?
Questions about the contract and risk
Minimums, term and exit
- Is there a minimum monthly or quarterly volume? What is the fee if I fall short?
- How long is the initial term?
- Does the agreement renew automatically? How much notice do I need to give to avoid renewal, and by what date?
- Is there an early termination fee? How is it calculated?
- When I leave, how quickly will you file a UCC-3 termination and send release letters to my customers?
- Will you provide a written payoff statement?
Recourse and risk
- Is the agreement recourse or non-recourse?
- If non-recourse, exactly what events are covered? Is it limited to customer insolvency or bankruptcy?
- What is excluded from non-recourse protection, such as disputes or deductions?
- What is the recourse period? When does it start?
- Do fees continue to accrue after the recourse period ends?
- How do buybacks work: cash payment, replacement invoices or offsets?
- Is a personal guarantee required? Is it a full guarantee or limited to fraud and breach of warranties?
Questions about your customers
Notification and customer contact
- Will my customers receive a notice of assignment? When and how?
- Do you offer non-notification factoring? What are the requirements?
- How do you verify invoices? Will you call my customers, and how often?
- Who on your team will contact my customers, and what is their approach to collections?
- Can I see a sample notice of assignment and a sample collection letter?
- What happens if a customer pays me by mistake? How quickly must I forward it, and is there a fee?
Customer credit limits
- How do you check my customers' credit?
- Will you set a credit limit for each customer? How will I know what it is?
- What happens to invoices over a customer's limit?
- How do I add a new customer, and how long does approval take?
- Will you tell me if a customer's credit weakens?
- Is there a limit on how much of my volume can come from one customer?
Questions about day-to-day operations
Funding speed and process
- How long does initial setup usually take for a business like mine?
- After setup, how fast do you fund verified invoices?
- What is the daily cutoff time for same-day funding?
- Do you fund by ACH, wire or both? What does each cost?
- What documents do you need with each invoice?
- Do you offer fuel advances or other industry-specific features, if relevant to my business?
Account management and reporting
- Will I have a named account manager? How do I reach them?
- What reports will I receive, and how often? Can I see open invoices, payments and reserves online?
- How do you handle disputes between me and a customer?
- What are your audit rights, and do I pay for audits?
- What UCC filing will you make? Will it cover only accounts, or all business assets? Can it be narrowed?
- How do you work with my existing lender, if I have one?
Industry fit
- Which industries do you work with most often?
- Do you have experience with my type of invoices, such as freight broker payers, progress billing, government contracts or healthcare payers?
- Are there any legal or contract rules in my industry that affect how you buy my invoices?
Before you sign
Once you have answers:
- Compare the total cost of each offer on the same sample invoice.
- Check that every answer matches the written agreement.
- Mark the renewal notice deadline on your calendar.
- Consider having your attorney read the agreement.
Frequently asked questions
Will a factor be offended by this many questions?
A factor that expects a long relationship should be ready to answer them. Clear answers now help avoid disputes later.
What if the answers differ from the contract?
The signed contract usually controls. Ask the factor to correct the agreement before you sign, or get the change in writing as part of the contract.