How to Factor Business Contracts

Factoring is a way to receive your cash-flow immediately. For many businesses, invoices to customers are seldom paid at appropriate times. This ties up accounting and project management, and prevents consistent profits from coming in. Factoring helps by allowing your company to sell invoices to a third party. That third party, a factoring company, pays you upfront, but not the full amount of the invoice. For example, if a $1,000 invoice is given to a factoring party, you could receive $850 back and the factoring party profits the $150. Although the full invoice is not paid back, the benefit of immediate payment is attractive for some businesses.

Suggestions

1. Investigate your business contract. Make sure that factoring is not explicitly excluded within the business contract.
2. Gather your accounts receivable from the business or businesses whose contract you want to factor. This will include all invoices given to the business. Some factoring companies may want forms of collateral in case the third company does not pay the factoring company for the invoice.
3.  Read over the factoring company contract very carefully. Some factoring companies set a minimum amount of invoices that can come from your company concerning a specific business. If you do not want to continue with the factoring company over that large set of time, then you may not want to sign the contract.
4. Sign the contract with the factoring company. Give the factoring company the business contract. The factoring company will make a copy of it for its records. The factoring company needs the contract to know how much the third business is contracted for and how the business can be reached.

Tips

• It may be best to let your company's lawyer read over a factoring company contract. Your lawyer will help determine if the factoring company is trying to take more money from you than you want, such as through minimum requirements for invoices.
• If the late-paying company does not give the factoring company the full invoice amount, the factoring company may go back to your company and ask for collateral to make up the difference.

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