Factoring Client Obligations
The factoring client’s obligations are the conditions you agree to fulfill in your relationship with the invoice factoring company (or the Factor). These terms may include personal guarantys, buy back stipulations (especially when factoring with full recourse), monthly minimums, contract termination and notification requirements, and monthly reports your company agrees to provide to the factoring company.
The terms which define your obligations as a factoring client could vary greatly depending on which company’s invoice factoring services you are considering. Let’s take a closer look at those which can radically impact how effective the factoring company’s program will be in helping to expedite cash flow for your organization.
Buy Back Stipulations: These are conditions that would require you to buy back an invoice previously factored. Full recourse factoring companies will often require you to buy back invoices if they go unpaid for a period of time, sometimes even as little as 30 days. They will also require you to buy back invoices if they are not paid due to credit reasons, such as insolvency of your customer. Buy back stipulations may also require you to reimburse a factoring company for collections or legal activities undertaken in trying to recover unpaid customer payments.
Opting to factor with a non-recourse factoring company may afford your business additional financial protection. If an invoice that has been factored is not paid due to insolvency of your customer, in most cases, the non-recourse factoring company will absorb the loss, not you. With non-recourse factoring, clients aren’t usually required to buy back invoices unless an invoice is disputed by your customer.
Factoring Minimums: Some factoring proposals require that you factor a minimum dollar amount, or may stipulate a higher fee if minimums are not met. Some proposals require that a client factors any and all invoices generated for a given client.
Working with a factoring company that doesn’t require you to commit to factoring minimums can keep you in the driver’s seat, so that you can do what is in the best interest of your organization and factor only when you choose.
Contract Termination and Notification Clauses: If you decide to stop factoring or you have determined that the invoice factoring services offered by another company would be better for your business, some factoring contracts will require that you provide advance notification – sometimes as much as 120 days in advance.
Failure to meet the notification requirements might make it impossible for you to make a change without absorbing significant financial penalties, or you may have to wait another 8-9 months before you can stop factoring or change factoring companies.
Before signing a factoring agreement, find out what penalties or notification requirements will apply should you decide to stop factoring or take your business to a different factoring company. You may also look for a factoring company that doesn’t require you to sign a long term contract.
UCC-1 Filing: As a client, you should never sign a proposal that gives a factoring company authorization to file a UCC-1 financing statement on your business before you have been allowed to review all of the closing documents (e.g., factoring contracts) that will apply to the relationship.