Factoring Agreement Template

FACTORING AGREEMENT TEMPLATE FAQ

What is a factoring agreement?

A factoring agreement is a contract where a business sells its accounts receivable (invoices) to a factoring company (the “Factor”) in exchange for immediate cash. Instead of waiting for customers to pay, the business receives an advance (often a percentage of the invoice), and the factor collects from the customers and later pays any remaining balance minus fees.

How is invoice factoring different from a loan?

Factoring is typically structured as a sale of receivables rather than borrowing money against them. The factor’s main source of repayment is the customer’s payment on the invoice. However, some arrangements look and feel like financing, so the agreement should clearly state whether receivables are sold outright and what happens if an invoice isn’t paid.

What does “recourse” vs. “non-recourse” mean in factoring?

In recourse factoring, the seller must buy back or replace invoices that aren’t paid for certain reasons (like non-payment after a set time). In non-recourse factoring, the factor takes more of the credit risk, but usually only for specific issues (like customer insolvency) and fees are often higher. The agreement should define these triggers clearly.

What fees are common in factoring agreements?

Common fees include a discount fee (factoring fee) based on time outstanding, service/administration fees, wire/ACH fees, minimum volume fees, and sometimes due diligence or termination fees. The agreement should show exactly how fees are calculated and when they are deducted.

Do customers need to be notified about factoring?

Often yes. Many factoring arrangements require notice to customers and a change in payment instructions so customers pay the factor directly. Some industries use confidential factoring where customers are not notified, but that requires a different structure and controls. This template includes options for notice and payment direction.

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