How to Negotiate an Invoice Factoring Contract
Cash flow management is the key to a successful business. Most times, it’s even more important than sales and profitability. If you’re a small business owner, invoice factoring can be a great tool to get you out of a cash crunch. Nonetheless, this convenient source of financing can come with its unique set of challenges. You don’t want to sign a contract that will put your business in jeopardy. Granted, factoring companies usually have ready contracts so there’s no room for negotiations. However, you can compare contracts from different providers in order to go with what works best for your business. Below are the top 5 things to look out for before putting pen to paper on a factoring receivables contract.
- Full Disclosure of All Charges
You should be aware of all fees charged by invoice factoring companies. There should be a level of transparency regarding all invoice factoring transactions. If it’s not clear how much you’re going to be charged, watch out – you’re likely in for an unwelcome surprise.
- Minimum Volume
Does the contract have a requirement for monthly minimum volume? You should be wary of agreements with this sort of arrangement. While it might seem okay given your current volumes, things might change in the course of doing business. Your business may experience a slump or grow to a point where your factoring needs reduce. If you’ve signed up for a contract stipulating the minimums, you’ll have to cover the cost of the minimum sales volume you committed to.
- Monthly Maximum
Ensure that the factoring company have the financial capability to meet your financial needs as you grow. If the contract has set a maximum factoring amount, then you might run into financial head winds when your company outgrows the set maximum. For this reason, it is best to go with a company that can accommodate the needs of your growing business. As a rule, you should go for a factoring company that can provide more financing than you need currently.
- Exit Strategies
Find out if there’s a way to cancel the factoring contract if you aren’t satisfied with the service provided. It’s impossible to tell with certainty whether an invoice factoring company will meet the unique needs of your business until you’ve used their services. If they do not provide for an easy way to get out, then they should allow you to sign up on a month-to-month contract. This will allow you to try out their services before committing to a long-term contract.
- Termination Fees
Most invoice factoring companies require a term commitment, especially for large transactions. Make sure to go over the termination charges. They should be reasonable and workable for your business. Ensure the contract spells out the conditions for termination and any penalties that may arise. You do not want to get stuck in a contract that will cost an arm and a leg to terminate. It is better to spend time and money doing your due diligence well in advance.