At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
A factoring agreement involves selling to a third party the rights to money you are owed by clients. Such an agreement can be described either as a loan or as the sale of an asset, depending on the specific details agreed. The main goal of negotiating an agreement is to strike the correct balance between getting the highest possible payment for the money you are owed, and obtaining the agreement conditions that meet your particular needs.
The principle of a factoring agreement is always the same: A third party, specifically a finance company, pays the business a proportion of the money it is owed, then collects the debt from the client and keeps the proceeds. The difference between what the business receives and what the client owes is the finance company's profit. The business will normally consider this a price worth paying to have access to the cash immediately and thus improve cashflow. Generally, the more elements of your agreement favoring the finance company, the higher the proportion of the debt the business should receive.
One area in which a business may be able to negotiate a better deal is with a recourse agreement. With such an agreement, the business retains some of the risk. For example, the finance company may agree to chase up the debt for only 90 days, after which the business must either refund any outstanding money or negotiate a new deal. A business agreeing to a recourse deal would normally demand a higher proportion of the debt to reflect this added risk. It might also negotiate the time period during which the finance company must pay the debt.
A variant of a recourse factoring agreement has the finance company pay only part of the money up front. The finance company will then hand over the rest of the business's share of the money when and if it collects the money from the debtor. This is a less favorable deal for the business, so the precise proportions of the two payments it will receive may be a negotiating point.
Not all areas of negotiating a factoring agreement involve the financial breakdown. One area for negotiation is in how much detail the business must provide about its debtors, which the finance company may use to set the proportion it keeps. Another point is whether there are any controls about the way the finance company behaves in attempting to collect the debt: a business may want to take particular steps to avoid upsetting customers.