Compare the whole arrangement
Factoring generally involves selling receivables to a factor for earlier access to cash. The agreement determines eligibility, fees, reserves and what happens if an invoice is not paid. The OCC’s receivables-financing overview provides background on this type of financing.
Ask for a written cost example
Have each company show what you would receive and ultimately keep for the same invoice amount and payment timing. Ask about the advance, reserve release, fee schedule, minimum volume, transfer charges, verification fees and any extra costs. Do not compare two headline percentages if they cover different periods or services.
Read the risk allocation
Ask exactly what “recourse” or “nonrecourse” means in that contract. A marketing label does not answer whether a disputed delivery, missing document, offset or customer insolvency can leave you responsible. Get the covered situations and exclusions in writing.
Check daily operations and the exit
- Who approves brokers or customers, and can approval change?
- What documents are needed and when can funding occur?
- Who contacts the customer about collections?
- How are reserves, short payments and disputes reported?
- Must all invoices be factored, or can you choose?
- What are the term, renewal, notice, termination and release requirements?
Also ask about any security interest, personal guarantee, exclusivity or obligations that could affect a future lender or factor. A qualified adviser should review those provisions before you sign.
Before you rely on this guide: Have counsel review applicable law, filings, disclosures and the specific agreement. No provider recommendation, guaranteed funding timeline or claim of universally available terms is made here.
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