How to Read an Invoice Factoring Agreement: Fees, Notification, Limits and Termination
Two factoring offers with the same headline rate can cost very different amounts once you read the full agreement. These are the sections to review line by line.
1. Advance Rate and Reserve
The advance is the share of each invoice paid up front. The rest is held as a reserve and released, minus fees, when your customer pays. Ask when reserves are released and whether they can be held against other invoices.
2. The Full Fee Schedule
Ask for every fee in writing, not just the discount rate:
- How the fee is calculated: flat, per 10 days, per 30 days, or daily
- Setup, due diligence, or lien search fees
- Monthly minimum volume fees
- Wire, ACH, or per-invoice processing fees
- Credit check fees on new customers
3. Notification and Verification
Most programs notify your customers to pay the factor directly and may verify invoices with them. Ask how that contact happens and who handles it, so your customer relationships stay intact.
4. Concentration Limits
If one customer makes up a large share of your receivables, the factor may cap how much it will fund against that customer. Know the limit before you count on funding.
5. Recourse
With recourse factoring, you buy back invoices your customer doesn't pay. Non-recourse usually covers a customer's insolvency, not disputes over the work or goods. Read the exact definition.
6. Spot vs. Whole-Ledger
Spot factoring lets you choose individual invoices. Whole-ledger requires you to factor all invoices from selected customers, usually at a lower per-invoice cost.
7. Term, Renewal and Termination
- Length of the agreement and whether it renews automatically
- How much notice is required to cancel
- Early termination fees
- How the lien (UCC filing) is released when you leave
Questions to Ask Before You Sign
- What would my total cost be on a typical month of invoices?
- What happens if a customer pays late or disputes an invoice?
- Can I add or remove customers later?
Also see factoring vs. an AR loan vs. a line of credit and switching factoring companies.
Related reading: Invoice Factoring in California · Freight Factoring for Truckers · Construction Invoice Factoring · Invoice Factoring in Fresno
General information, not a quote or offer. Advance rates, fees, and terms are set by each capital provider and depend on your customers, invoices, and business. Every arrangement is subject to underwriting and approval.