A factoring agreement details the responsibilities of both the billing company and the factor in a factoring transaction. Factoring is not just about turning some invoices over for cash. There must be an agreement made on how many invoices are to be purchased, for what length of time, how much money will be paid upfront, what the fees and rates will be, which type of invoices will be purchased, and a recourse or non-recourse clause.
Factors may agree to purchase a set dollar amount of invoices, or they may agree to purchase invoices for an amount of time, typically between 3 months and a year. The factor typically reserves the right to review the billed clients’ credit records and may not agree to purchase invoices that are more than 60 or 90 days past due.
Once the invoices are purchased, the factoring agreement may state that the factor is responsible for collecting the entire balance from the client through whatever means necessary, or, it may designate this responsibility to the small business owner. The factoring agreement should clearly stipulate the fees that will be deducted from each transaction as well as the percentage of the invoice to be paid up front. The factoring agreement also needs to include a recourse or non-recourse clause. A recourse clause places the burden of uncollected invoices back on the business and requires the business to pay that amount to the factor. With a non-recourse clause, the business sheds all responsibility of the invoices, and the factor assumes all risks for collection. Most experts would advise consulting an accountant and a lawyer before signing a factoring agreement.