Factoring Contracts
Factoring contracts are agreements in which a business sells its unpaid invoices, at a discount, to a factoring firm that will provide them with an injection of capital. These agreements simply lay out the details of the discounted price of the invoices, any additional fees, and the time period in which the invoices must be paid before your business becomes liable for the unpaid sum. This is an excellent alternative to hard-to-obtain bank loans and allow you to continue to be fully functional without being in debt or having to sell equity.
Factoring Contract Process
Invoice factoring is a fairly straight forward process. Your business has invoices that are yet unpaid by your customers. If your company needs an extra financial boost, you can sell those invoices at a predetermined discount to a factoring firm. This allows you to get a full, immediate amount rather than smaller payments over an undetermined length of time. It also allows you to get someone to handle the hassles of collecting the unpaid invoices. Your business is, however, responsible for the amount of the invoices that remain unpaid at the end of the predetermined time period (usually about 90 days).
Rather than taking out a sum of money in a bank loan and paying interest, your cost is only the discount of the price of the invoices. For example, if you have $15,000 in unpaid invoices, you can sell those invoices to a factoring firm for a discount. If the discount is 10% (the actual value is based not on your business’ credit worthiness but on that of your customers since they will be paying the invoices) then you can immediately get $13,500 while the factoring firm makes their profit in the difference between the discount and the full amount owed. Factoring rates differ and start at under one-percent.