Leaving Penalties

This post addresses one agreement term that is negotiable when working with a factoring company. Some agreement terms are extremely non-negotiable, for instance; having invoice payments made by customers coming directly to the factor.

But the terms of the factoring agreement relating to the period of the relationship may be negotiable, meaning you can agree to them or decide the Purchase & Sale Agreement is not a fit for you and try elsewhere. The term we are looking at here is the anniversary period included in some factoring agreements.

Some factors include an anniversary date in their agreements, meaning you have to notify the factor within (usually 90 days in writing) that you intend to terminate the relationship. Unfortunately many small businesses overlook these few sentences in the agreement and only find out about them when they decide it’s time to leave.

Be aware the anniversary term is a penalty charge attached to leaving a contract period early. This can harm you in a number of ways;

    1. If your contract says you have to stay for 12 months and you want to leave early, you will have to pay a penalty of the fees that would have been generated had you stayed for the full 12 months.

    2. If you miss notifying the factor that you intend to terminate the agreement and it goes past the annual automatic anniversary renewal, you will be faced with paying a penalty as described in #1.  Some factors are hard core and if you miss the anniversary by even a month or two, you face a penalty of potentially of 10 – 11 months of unused fees.

    3. The penalty is usually calculated by the initial terms of the agreement. If you agreed to pay a X% discount for a minimum monthly usage of $YYY, that would represent the minimum monthly fees the factor anticipates earning during the annual contract.

ON THE OTHER HAND

All of the above can be completely disregarded by working with a factor like Creative Capital Associates, Inc which does not have monthly minimums or contract periods with penalties. Our clients are free to leave us without penalty. So the point of this post is, you should understand contract terms when initiating an agreement for invoice factoring.