A factoring agreement can run many pages. Most of it is standard. A handful of clauses decide your real cost, your flexibility and your exit. This chapter walks through them so you know where to look.
For a line-by-line walkthrough, see our guide on how to read a factoring contract.
Start with the proposal
Before the contract, most factors send a proposal or term sheet. It is a short summary of the main terms. It is usually not binding.
When you get one, check that it states:
- The advance rate
- The full fee schedule, including how fees grow over time
- How and when the reserve is released
- Recourse or non-recourse terms and the recourse period
- Minimum volume, if any
- Contract length, renewal and termination terms
- Every additional fee, such as setup, wire, ACH or service fees
Then compare the final agreement to the proposal line by line. If a term changed, ask why before you sign.
Money terms
Advance rate
The percentage of each invoice paid to you up front. The agreement may let the factor change the rate, for example if disputes rise or a customer slows down. Look for that language.
Fee schedule
How the factor charges for each invoice. It may be a flat fee or a tiered schedule that grows the longer the invoice is unpaid. See the next chapter for how these structures work.
Check whether fees are charged on the full invoice amount or only on the amount advanced. Check the length of each fee period and whether a partial period is charged as a full one.
Reserve
The portion of each invoice held back until your customer pays. The agreement explains when the reserve is released and whether the factor can hold it to cover other unpaid invoices. Some agreements let the factor keep a reserve for a period after you terminate.
Volume and term
Minimum volume
Some agreements require you to factor a minimum dollar amount each month or quarter. If you fall short, you pay a fee as if you had met it. Ask whether minimums apply and how the shortfall fee is figured.
Term and auto-renewal
The term is how long the agreement lasts. Many agreements renew automatically for another term unless you give notice. Missing the notice window can lock you in for another full term.
Termination notice and fees
Read what it takes to leave:
- How much written notice you must give, and when
- Whether there is an early termination fee, and how it is calculated
- What happens to open invoices and reserves after you leave
- Whether the factor will file a UCC-3 termination and send release letters to your customers
Risk terms
Recourse period
How long the factor waits for payment before it can make you buy back an unpaid invoice. Check whether fees keep accruing during and after this period. See the chapter on recourse vs. non-recourse.
Full-ledger vs. selective factoring
- Full-ledger (or whole-ledger) factoring means you sell all your receivables, or all receivables from named customers.
- Selective or spot factoring lets you pick which invoices to sell.
Full-ledger terms often come with lower per-invoice pricing but less flexibility.
Personal guarantee
Many factors ask owners to sign a personal guarantee. Some guarantees cover everything you owe. Others are limited to fraud or breach of warranties, sometimes called a "validity" or "performance" guarantee. Know which one you are signing.
Warranties
When you sell an invoice, you make promises about it. Common warranties include:
- The work is done or the goods are delivered
- The amount is correct and owed
- There is no dispute, offset or side agreement with the customer
- You have not sold or pledged the invoice to anyone else
If a warranty turns out to be false, the invoice is usually sent back to you, even under non-recourse terms.
Operating terms
Misdirected payments
If a customer pays you instead of the factor, the agreement will require you to turn the payment over quickly, often within one or two business days. Some contracts charge a fee for misdirected payments. Treat this clause seriously. Keeping a misdirected payment can be a serious breach.
Audit and inspection rights
Most agreements let the factor examine your books, records and invoices, sometimes on short notice. Some charge you for audits. Ask how often audits happen and who pays.
Default and remedies
The agreement lists events of default, such as missed buybacks, false warranties or new liens. It also lists what the factor can do, which may include stopping advances, collecting directly from all customers, or demanding immediate repayment.
Governing law and disputes
Look for which state's law applies, where any lawsuit would be filed, and whether disputes go to arbitration.
Frequently asked questions
Can I negotiate a factoring agreement?
Often, yes. Common points of negotiation include contract length, termination fees, minimum volume, the scope of the UCC filing and the type of personal guarantee. Ask before you sign, not after.
What is the most overlooked clause?
Auto-renewal combined with a narrow notice window. Put the notice deadline on your calendar the day you sign.
Should a lawyer read my factoring agreement?
It is a binding contract that can include a personal guarantee. Having your own attorney read it before you sign is a sensible step.