What you need to know about invoice factoring before you sign up
The benefits of borrowing money based on outstanding sales invoices are undeniable, but you need to ensure that all aspects of your factoring agreement are acceptable. Scrutinising the small print before signing what is usually a long-term contract is vital to avoid ‘hidden’ costs or terms that aren’t quite right for your business.
If you didn’t hire an invoice finance broker to help you find the best lender, it is a good idea to seek professional advice on the merits and downsides of your agreement. Although on the face of it, invoice factoring is an effective way to deal with cash flow issues, your individual business needs and objectives need to be taken into account.
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What constitutes a factoring agreement?
Length of contract and notice period for exit
Factoring contracts are generally long-term, and can be difficult to exit without detailed planning. Some companies offer a free trial, but if yours doesn’t, you’ll need to know the minimum term and notice period required should you wish to end the arrangement.
Factoring fees and charges
Being charged ‘hidden’ fees is a common complaint from business owners who haven’t checked the small print. Of course, lenders aren’t allowed to hide fees and charges, but they don’t always make them stand out in their contracts either.
Some of the language used in this market can be ambiguous or unclear, and it is often only those with experience in this particular type of finance who are able to quickly decipher the small print.
In some cases, financiers require collateral before they will lend. This is because their risk is largely based on the credit-worthiness of your customers, and if there is any doubt about their ability or willingness to repay, you may be asked to provide the backing of an asset.
Specific types of contract
Confidential or disclosed
Factoring and invoice discounting agreements are often tailor-made to each company, and its objectives. For example, you may wish to keep the fact that you are borrowing money against customer debt confidential, in which case the lender’s name will not be included on your invoices.
Confidentiality is an important issue when a company’s unique selling point is based on excellent customer communication and care. A third party’s involvement in the debt collection process could destroy an otherwise impeccable reputation in the eyes of a customer.
Recourse or non-recourse
Something else to watch out for is whether or not you become liable should a customer fail to pay. Factoring agreements with and without ‘recourse’ are available, with the non-recourse option involving higher fees due to the lender’s increased risk which is mitigated by a credit insurance policy.
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Other terms and small print
- There may be a minimum number of invoices that need to be sent out each month
- Don’t forget to check for minimum annual fees
- Is your contract generic, or adapted to suit your particular objectives in business?
Real Business Rescue offers confidential advice on all aspects of invoice finance. We can check your agreement to make sure it suits your needs, and our offices around the country, offer a same day consultation to discuss your requirements.