Often you will see mention of No Contract Periods when seeking invoice factoring. For instance, we make no contract commitment demands in our contracts. Why is this important?
Although it’s hard to find these days, some factors will sign up clients for annual contracts. This contract condition came largely from the ABL industry. Asset Based Lenders (ABL) are the next step up on the commercial finance ladder. They typically fund companies with more than one million dollars of new monthly billings. The financing is set up as a sort of line of credit where the receivable availability is monitored by the lender. An ABL company who sets up this type of arrangement has to go to great lengths to set up the facility. Therefore, the contract will usually read that the loan is for a minimum of 12 months.
So long ago, some factors copied this condition for financing invoices and sign up clients to a 12 month contract. Why is this critical to you when seeking a factoring relationship? It could be a costly decision.
With contract periods, the finance company will determine the amount of minimum fees the contract will generate by multiplying the fee rate by 12 months. In order to exit this contract early, the borrower must pay the unused portion of fees that would have been generated for the full term of the contract. It is a (sometimes severe) penalty for leaving the contract before the anniversary.
Equally important with these types of contracts, you will usually have a 60 day window to notify the factor of your intention not to renew, or the contract automatically renews setting you up to have to pay to leave once again.
Remember, we do not put this condition on our clients – they are free to go at anytime without penalty.