Read The Entire Contract Before Entering Into An Invoice Factoring Arrangement
Many companies who are in a cash flow bind, either because of poor profitability or accelerated growth, need a financing option that isn’t dependent upon their credit standing or internal fin...

Many companies who are in a cash flow bind, either because of poor profitability or accelerated growth, need a financing option that isn’t dependent upon their credit standing or internal financial ratios. Factoring is the obvious choice for entities in this situation because the focus for underwriting is on the credit worthiness of the client’s customers.

It should be made clear to the client at the onset of the relationship that the factoring company typically expects invoices to be factored for a period of time, usually for a year. In other words, there is a minimum amount of fees that will be charged whether the company factors invoices or not.

This is not usually an issue, as most companies that take advantage of factoring tends to use the service for one to two years. At that point, they usually have found a way to secure other financing. Other companies, however, need only a “shot in the arm” by a one-time infusion of cash. For those firms, factoring may not be for them. They will be charged fees during the contract period for services that aren’t being used. On the other hand, having a steady stream of cash by not having to wait 30-60 days to collect receivables can be advantageous.

It is incumbent upon the factoring company’s representatives to clearly explain how the factoring process works. It is also imperative that the client and/or their attorney to review the commitment letter and contract in its entirety so there will be no surprises.

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Category : Business