What -Businesses-Need-to-Know-about-Invoice-Factoring-Agreements

What you need to know about invoice factoring before you sign up

The advantages of borrowing money based on outstanding sales invoices are evident, but it’s crucial to ensure that all aspects of your factoring agreement are acceptable. Scrutinising the small print before signing what is usually a long-term contract is vital to avoid any ‘hidden’ costs or terms that aren’t quite right for your business.

If you didn’t engage an invoice finance broker to assist in finding the best lender, seeking professional advice on the merits and downsides of your agreement is advisable. Despite the apparent effectiveness of invoice factoring in addressing cash flow issues, your individual business needs and objectives must be taken into account.

 

What constitutes a factoring agreement?

I. Length of contract and notice period for exit

Factoring contracts typically extend over the long term and can be challenging to terminate without careful planning. While some companies provide a free trial, if yours does not, it’s essential to be aware of the minimum term and notice period necessary should you decide to conclude the arrangement.

II. Factoring fees and charges

Business owners frequently complain about incurring ‘hidden’ fees when they overlook the fine print. While lenders are not permitted to conceal fees and charges, they may not always highlight them prominently in their contracts.

The language employed in this market can be ambiguous or unclear, and it’s often only those experienced in this specific type of finance who can swiftly decipher the fine print.

III. Collateral

In certain instances, financiers may demand collateral before extending a loan. This is due to their risk being primarily linked to the creditworthiness of your customers. If there is any uncertainty about their capacity or willingness to repay, you might be requested to provide the support of an asset.

 

Specific types of contract

I. Confidential or disclosed

Factoring and invoice discounting agreements are frequently customised to suit each company and its specific objectives. For instance, you might prefer to maintain confidentiality regarding borrowing against customer debt. In such cases, the lender’s name will not be disclosed on your invoices.

Confidentiality is a critical concern, especially when a company’s distinct selling point relies on excellent customer communication and care. The involvement of a third party in the debt collection process could potentially harm an otherwise impeccable reputation in the eyes of customers.

II. Recourse or non-recourse

Another consideration is whether you assume liability in case a customer fails to pay. Factoring agreements with and without ‘recourse’ are offered, with the non-recourse option incurring higher fees due to the lender facing increased risk, which is offset by a credit insurance policy.

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Other terms and small print

  • Verify if there is a minimum number of invoices required to be sent out each month.
  • Ensure to check for any minimum annual fees.
  • Confirm whether your contract is generic or tailored to align with your specific business objectives.


Vanguard Insolvency provides confidential advice on all facets of invoice finance. We can review your agreement to ensure it aligns with your needs, and our offices nationwide offer same-day consultations to discuss your requirements.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.