Sample Factoring Agreement

A Sample Factoring Agreement: What You Need to Know

If you operate a business that relies on a steady stream of cash flow, you may have considered factoring as a way to secure funds quickly. Factoring is a financial transaction where a company sells its accounts receivable, or invoices, to a third-party financial institution called a factor. This allows businesses to receive immediate cash to operate and grow, rather than waiting for lengthy payment terms from customers.

Before entering into a factoring relationship, it’s important to understand the terms of the agreement between your company and the factor. Below is a sample factoring agreement, along with explanations of key sections:

1. Definitions

The definitions section outlines the specific terms and phrases used throughout the agreement. This section is important because it ensures that both parties understand the language used and can avoid misunderstandings.

2. Factoring Services

This section details the factoring services that the factor will provide, including invoice verification, funding options, and collection of accounts receivable. The agreement should also outline any fees associated with these services and when they will be charged.

3. Advances

Advances are the funds advanced to the business by the factor against the face value of the invoices. This section outlines the amount of the advance, the fees associated with it, and any limitations or conditions on the use of the funds.

4. Reserves

Reserves are funds that the factor holds back to cover any discrepancies or disputes regarding the invoices. This section outlines the reserve amount, the conditions under which the reserve will be released, and any fees associated with it.

5. Termination

The termination section outlines the conditions under which either party can terminate the agreement. This includes details on the notice required for termination and any penalties or fees associated with early termination.

6. Representations and Warranties

This section outlines the promises made by both parties regarding the validity and accuracy of information provided. This includes information on the company’s accounts receivable, the financial health of the business, and any legal or regulatory requirements.

7. Confidentiality and Non-Disclosure

This section outlines the confidentiality requirements of both parties. It may include details on the protection of confidential information, the use of such information, and the consequences of any breaches.

Overall, a factoring agreement is a complex document requiring careful consideration and review. Any business considering factoring should work with a qualified attorney or financial advisor to ensure that the agreement is fair, reasonable, and favorable to the business.