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5 Tips for Negotiating an Invoice Factoring Contract

Triumph Business Capital

May 14, 2015

The best factoring companies have your best interests in mind. Here’s how to select the right one for your business.

I was perfectly happy with my streaming Internet service until a few months ago, when a lady on the phone called and convinced me to sign a two-year contract inviting cable back into my life. It was only going to cost me a few dollars extra each month, and I would get to watch all the shows I had missed since my husband convinced me to “cut the cord.” I gleefully scanned the list of channels and awaited the arrival of the cable box. All was right with the world. Then, the bill came in. There were extra taxes, activation fees, state and federal charges. All told, I’m paying about $75 a month more than I was before. Now, I want to cancel the service — but I’ll be hit with cancellation fees if I do. Even worse? I’ll have to hear my husband say, “I told you so.” The moral of the story? It pays to read your contract.

I regularly work with growing companies that use invoice factoring to float cash flow, and I often see this common theme: Reviewing the invoice factoring contracts, and comparing invoice factoring companies, makes all the difference. I recently spoke with Steven Hausman, President of Triumph Business Capital, and he shared with me several key things to look for when reviewing your invoice factoring contract. As Mr. Hausman noted, most invoice factoring companies will already have contracts in place, meaning there may be little room for negotiation. However, by comparing contracts from several invoice factoring companies, and searching for the key items listed below, you can choose the best factoring company for your business.

Here are the top five things to look for before signing your invoice factoring contract:

1. Full Disclosure of Fees and Other Charges

From billing clients, to collecting payment, to managing payroll, factoring companies provide a number of valuable services to their clients — and reasonable service charges are to be expected. However, not all accounts receivable factoring agreements fully disclose these fees. While you generally get what you pay for, you have a right to demand transparency in all of your invoice factoring transactions. If fees are not clearly defined from the start, watch out — you may be in for an unwelcome surprise later.

2. Monthly Minimums

Be wary of invoice factoring agreements that include a minimum volume requirement per month. While it may seem simple to estimate your monthly volume today, what happens if your business changes tomorrow? What if your business experiences a slump in volume? Or, conversely, what if your business grows to the point that you have more clients who pay faster, and your factoring needs decrease? If you signed a contract with monthly minimums, you’ll have to pay minimum invoice factoring fees for each month when you don’t meet your “minimum sale volume commitment.”

3. Monthly Maximums

On that note, be sure to choose an invoice factoring company with the financial capability to support your business growth. If your invoice factoring contract includes maximum amounts that are too low to meet your future needs, you might be better off choosing an invoice factoring company with stronger financial backing. While we don’t recommend letting the size or capacity of your factoring company hold you back, we do recommend choosing a company that’s the right size, with the right resources, for your business. Bigger is not always better — but stability is essential.

4. Month-to-month Contracts and Exit Strategies

Is there an easy way to cancel your invoice factoring contract if you are not satisfied with the services provided? All invoice factoring companies are different, and beyond asking for recommendations and reading factoring company reviews, the best way to know whether an invoice factoring company is a good match may be to try it. If your factoring company doesn’t fit, you’ll probably know within the first few weeks. In order to find the right invoice factoring partner for your business, while keeping everyone fair and honest, look for factoring companies that offer month-to-month contracts. This approach lets you try out an AR financing partner for a reasonable time period, before entering a long-term contract.

5. Termination Charges

As with any contract, both parties in an invoice factoring contract are making commitments to one another. While it is reasonable and appropriate to require a term commitment, especially for larger transactions, it’s also important to ensure that any termination charges are reasonable as well. Make sure your contract spells out exactly how much you will be charged for early termination — and whether any additional conditions or penalties may apply. Less reputable factoring companies may over-charge you for early termination, or impose penalties designed to prevent you from ever leaving — just like the cable company did to me.

If you’re considering entering a contract with an invoice factoring company, be sure to read between the lines. A little extra time reviewing these five items may save a lot of headaches — and money — in the future. Oh, and one more hint from Mr. Hausman: If you’re not sure whether an item is negotiable, just ask. You might hear “no” — or you might just get a better deal!

If you want to explore more about invoice factoring, contact Blaine Waugh at Triumph Business Capital.