How to read a factoring agreement: 8 lines to check

1. How the fee is counted. Flat per 30 days, by the day, or in blocks (like every 10 or 15 days)? On a $50,000 invoice at 2% paid on day 38, counting by the month costs $2,000; by the day, about $1,267.
2. What the fee is charged on. The full invoice or only the cash advanced? On that same invoice with 90% advanced, 2% of the invoice is $1,000 per 30 days; 2% of the advance is $900.
3. Extra fees. Setup, wire or transfer, credit checks, lockbox, monthly service fees. Add them up per month, not per item.
4. Monthly minimum. If you factor less than the minimum, you may pay as if you hadn't. Compare it to your slowest month, not your average.
5. Reserve and when it's released. The part held back (often 5% to 20%) comes back when your customer pays, minus fees. Check how often it's released.
6. Recourse. How many days before an unpaid invoice comes back to you, and what "non-recourse" covers if you have it. More on recourse.
7. Term and automatic renewal. Many agreements run 6 to 24 months and renew unless you cancel in a window, often 30 to 90 days before the end.
8. Exit fee. What it costs to leave early, sometimes a flat amount, sometimes a percentage of your line. Get it in writing.

Also worth a look

• Whether you must factor all invoices or can pick (spot factoring usually costs more)
• Personal guarantees and what they cover
• How and when the funder contacts your customers

General information, not legal, tax or accounting advice. Every funder and contract is different. Examples use made-up numbers.

Want to see this done on a real-looking offer? See a sample review.