There is a very important distinction between factoring companies that you should be aware of. The old way of setting up a factoring relationship was to have a “contract period.” It used to be that the majority of accounts receivable factoring companies would operate in this manner.
In the contract the terms of the contract period would state that your discount fee is based on the length of the contract. This would be matched with a minimum amount of funding per month. In other words, you would be required to fund a specific amount of invoices every month which would generate a minimum amount of factoring fees. Should you not fund the minimum, the minimum amount of fees would be deducted anyway out of your reserve account (portion of invoice not made in the initial advance.) This forced clients to factor invoices even if they didn’t need to.
Then if the client decides they want to leave the factoring relationship early, before the contract period set in the Factoring Agreement, they would have to pay the minimum amount of fees that would have been generated during the unused period. There would be a penalty paid to leave.
Thankfully the factoring industry has modernized and the majority of factors no longer have these sorts of conditions in their contracts – but there are still plenty out there that do. So buyer beware, look for early withdrawal penalty clauses (and also auto renewals.)
Creative Capital Associates has no minimum amounts or contract period conditions in our funding relationships.