In this section, we will explain what makes up an Invoice factoring agreement.
Firstly, it is important to note from the outset that a factoring agreement is a financial contract. It sets out the terms on which a factoring company agrees to purchase a business’s outstanding invoices. Next, the agreement should detail everything from upfront costs to whether the arrangement allows for recourse or non-recourse factoring. Moreover, a factoring agreement allows a business to build an ongoing relationship with an finance company. This could be vital in securing much needed cash flow in the future.
Next, we take a look at what a factoring agreement is. How it works. As well as what to look out for before you sign.
The invoice finance process begins with the signing of a factoring agreement. This sets out the terms on which a finance company will purchase a business’s accounts receivable. It will put into writing the fees associated with the agreement. Also, how the factoring company will go about collecting unpaid invoices from the business’s clients. And who takes responsibility for unpaid invoices.
A factoring agreement with recourse means that your business becomes liable for any sums that its customers do not pay. Whilst, a without recourse agreement will protect the business from further liability. This is useful in the event that any clients do not pay or become insolvent during the factoring period.
Factoring your business’s invoices could help your cashflow by securing a line of finance based on your customers unpaid invoices. In addition, invoice factoring has numerous other benefits including:
A quick and easy process
Release funds from its accounts receivables long before your clients would have paid up.
Protection from bad debt risk, if you opt for non-recourse factoring. This means that the factoring company will assume responsibility for unpaid debt. Thereby removing this potential expense from your books.
Improved client relationships. You will no longer have to deal with the invoice collection process. This can often strain otherwise positive working connections.
Invoice factoring, or factoring receivables, is a form of invoice finance. A company realise money in the short term by selling its outstanding invoices to a factoring company. The factoring company then collects payment of the outstanding receivables from your customers. It then pays the final balance (minus fees) to the business when the invoice is settled.
An invoice factoring agreement puts into writing the rights and obligations of the business and the factoring company. There are various forms of factoring that deviate from the conventional process. These include spot factoring, single invoice financing, selective factoring and even reverse factoring.
It's important for those entering into an invoice factoring contract to know about the terms and conditions contained within it. A factoring agreement contains terms that set out the cost to your business. It also details the responsibilities that fall to both the business and the factoring company. Without insight into these terms, you could leave your business open to unnecessary levels of risk.
It’s always advisable for business owners and managers to read factoring agreements carefully. The business should seek independent legal advice to ensure that they understand all the material elements of the contract.
Many finance companies use a fairly simple factoring agreement template that covers off similar terms. So, whilst your factoring agreement may contain bespoke terms, it’s worth looking out for the common provisions listed below.
Selling Accounts Receivable: Every factoring agreement will cover which invoices you will be selling. (or ‘factoring’). It will also confirm whether your agreement involves all your invoices. Alternatively, you may choose selective factoring. In this case you may choose which invoices to sell.
Creditworthiness: Finance companies will generally look at the relative creditworthiness of both your business and its customers when deciding whether to approve your application for invoice factoring,
You may therefore need to consent to the factoring company’s vetting of your customers in order to reach an agreement.
Advance Amount: This is arguably the most important element of a factoring agreement. It will set out what percentage of each invoice’s value your business can expect to get upon sale. The remainder will be paid out (minus fees) once the customer has paid up. However, the whole purpose of invoice finance is to release your working capital. You need to check the agreement provides you with a sufficient upfront payment for each invoice you factor.
Every invoice factoring agreement should contain terms which concern the fees to be charged. It should also detail the process for terminating the arrangement. This will vary from company to company. However, you will generally need to give the company notice that you intend terminate the factoring agreement. This advanced notice must usually be given between 30 and 90 days before the contract is due for renewal. Or the same period before the date on which you wish your agreement to end.
Invoice factoring can be of huge help to a business’s financial outlook. However. it’s important to make sure you’re getting finance on terms that suit you. By using our simple invoice finance comparison tool, you can compare the UK’s best factoring providers. It can help you can find an arrangement that meets your needs. You can choose from conventional invoice factoring to selective invoice finance and bespoke package. There’s no longer any need to worry about your business’s cash flow. With the option to sell your accounts receivables, you could have working capital to use in no time. Safe in the knowledge that you’ve gotten a good deal by using us.