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As your business grows, your financial obligations will grow with it. From an expanding workforce needing payment to new equipment or facility requirements, your organization may not always have the working capital to keep up with demands.
Factoring can provide many advantages for companies that need to accelerate or maintain a steady cash flow. It allows your business to access capital tied up in invoices, enabling your company to keep up with expenses and enjoy flexibility in your growth efforts.
What Is a Factoring Agreement?
A factoring agreement is a contract that outlines the process of a business selling outstanding invoices, also known as accounts receivable, to a third party for upfront cash. The factoring process follows a few simple steps:
- A client requests products or services from your company.
- You contact your factoring company to verify whether the client’s invoice will qualify according to your invoice factoring contract terms.
- Your company delivers the products or services as requested.
- You sell the approved invoice to your factoring company and receive payment quickly.
- Your factoring company handles the collections process and sends you any remaining money owed once your client pays them and they have deducted their fee.
Factoring can benefit companies by providing them with liquid capital to meet short-term needs, such as payroll, marketing, and equipment purchases. It helps them maintain cash flow as they grow by taking on new clients or expanding their services. If your business is considering factoring, these are some of the typical contract terms and fees.
Common Fees & Terms in an Invoice Factoring Contract
Every factoring company has different expectations and rules, but certain fees and terms are common in contracts. Understanding these terms will help you determine the best factoring agreement for your specific needs.
Advance Rate
The advance rate is what your factoring company pays you upfront. It will be a percentage of your invoice amount, usually around 70% to 90%. The percentage will depend on your factoring company, so be sure to discuss this rate when negotiating your factoring contract so you know what to expect. You’ll also want to review when this rate is paid so you can plan accordingly.
Origination Fees
When drafting a factoring contract, your factoring company will likely ask you to pay a flat-rate fee upfront. This fee is calculated as a small percentage of your total facility amount. Funds from the factoring agreement usually offset the expense.
Notice of Assignment (NOA)
You or your factoring company will need to notify your clients about the change in payment processes. A notice of assignment will keep your customers informed and ensure payments are made correctly. Any payments you receive for a sold invoice must be sent to the factor.
What to Consider When Reviewing an Invoice Factoring Agreement
Follow these tips to ensure the best chances of success when engaging with a factoring company.
1. Study the Details of the Invoice Factoring Contract
Always read the agreement in full before signing. Be aware of every fee, deadline, and expectation so you can start your business partnership on the right foot. Communicate with your factoring company to discuss the purpose behind fees, confirm payment speeds and learn the value of their different services. It might also help to review the factoring contract with a trusted partner or lawyer to ensure you fully understand the details.
2. Understand Obligations
When you submit invoices to a factoring company, your customers pay the factoring company directly. When the factoring company collects payment, your company receives the remaining invoice amount minus the factoring fee. Work with your factoring company to create an agreement that satisfies both organizations’ needs and expectations.
3. Evaluate Your Factoring Company’s Reputation and Practices
Select a company that will care for your customers just as you do to ensure their satisfaction. When searching for a factoring company, assess its reputation to ensure they are reliable and trustworthy. Have a clear understanding of how they conduct business and how they plan to interact with your customers.
Contact Porter Capital for a Contract Factoring Quote Today
If you’re ready to begin factoring your invoices, Porter Capital can help. We have more than 30 years of experience working with businesses of all sizes and across multiple industries, enabling them to enjoy faster cash flow, stable growth and a competitive edge. We will help you find the best solution for your specific needs.
With advances up to 90% on each invoice, competitive rates and flexible financing solutions, your company can receive the cash you need to grow when you work with Porter Capital. Contact us online today to receive a quote for our factoring services.
