Save Signed Factoring Agreement For Free

What Is a Factoring Agreement? A company and a factor enter into an agreement in which the factor purchases a company's accounts receivable (such purchased accounts are called factored accounts), collects on the factored accounts, then pays the company the purchase price of the accounts.

Bank loans are borrowed money you have to repay, and they are a liability. They also count as debt on your balance sheet. With accounts receivable factoring, you aren't borrowing money; you're simply changing who owns the invoice and who collects payment from your customer.

Factoring is not considered a loan, as the parties neither issue nor acquire debt as part of the transaction. The funds provided to the company in exchange for the accounts receivable are also not subject to any restrictions regarding use.

Factoring is a type of financing agreement where a creditor buys the rights to or the credit risk of a company's accounts receivable. Instead of getting a loan from a bank, a company may sell their accounts receivable to a creditor for a fee instead to shore up immediate cash or improve their balance sheets.

Invoice financing is similar to a traditional secured loan in that it has set payment terms and interest charges accumulate on outstanding balances, but it uses one or more invoices as collateral for the loan. In invoice factoring, the cash the business receives isn't in the form of a loan.

Most factoring transactions don't use a full advance. Instead, they advance less than 90% of the invoice and hold the rest as a reserve. This reserve is rebated once the transaction settles. The reserve is an essential component of a factoring transaction.

If the contract is a recourse factor and the customer doesn't pay, you may have to buy back the unpaid receivable from the factoring company or replace it with a more current receivable of equal or greater value.