What are Invoice Factoring Agreements?

Invoice factoring agreements (contracts) are the core of the relationship between a client and a factoring company. Factoring agreements typically include:

• The length of service
• The volume commitment
• The advance rate
• The factoring fee (cost)

How Does a Factoring Agreement Work?

Invoice factoring agreements protect the business and the factoring company. As with any type of agreement, it will detail the responsibilities and actions of each party. Before entering into an agreement with a factoring company, it is important to understand the key elements of the factoring agreement.

Length of Factoring Agreements

The term of the contract varies depending on your program. Contracts may be written for a month-to-month term, 12 months, or for multiple years. Many factoring companies offer monthly terms, which are useful when businesses that want to avoid a long-term commitment.

Volume Commitment

Most agreements include a volume commitment. By committing to factor a specific volume of invoices, a company can receive the maximum advances and lowest rates to optimize their cash needs. When committing to a monthly volume, know your work and invoicing volume and bring up any seasonal ups and downs that your business experiences.

Factoring Advance Rates

Most of the time invoice financing companies advance 80 percent to 95 percent of the invoice amount. The amount advanced is based on variables such as your customers’ creditworthiness, pay trends, and volume. It is important to understand when you will receive the advance. When reviewing the agreement with the factoring company representative, get clarity on how quickly your invoices are processed and when you will receive the advance in your bank account.

Factoring Fees

A factoring company’s fees are based on elements such as monthly volume, the amount of your invoices, the industry you work in, customer pay trends, and other variables. Some factoring companies charge a flat fee for the service, whereas others may have a factoring fee and additional charges for other administrative and support services they provide. Be sure to read the fine print of your contract so you know exactly how much you’re being charged. To learn more about factoring fees, use the invoice factoring calculator.

Review the Factoring Agreement

Just like any contract, it is important to review and understand your invoice factoring agreement. Ask questions of the factoring company representative and get clarity where needed. A good factoring agreement will solidify your relationship with the factoring company and be the starting point of a successful factoring program.