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Factoring is a form of financing in which you sell your outstanding invoices to a factoring company, which pays you (part of) the amount immediately. This improves your cash flow and eliminates the need to chase the money yourself. However, there are legal considerations, such as the risk of non-payment and potential prohibitions.
What is factoring?
With factoring, you transfer your invoices (claims on customers) to a factoring company. The company pays you quickly, often a large portion of the invoice amount, and then collects from your customer itself. You therefore do not have to wait for payment, which benefits your liquidity and cash flow and saves you administrative worries.
With or without credit risk
An important distinction is who bears the risk of non-payment. With factoring 'with recourse', that risk remains with you: if the customer fails to pay, you must repay the amount to the factor. With factoring 'without recourse' (non-recourse), the factor assumes the credit risk. The latter is more expensive, but offers you greater security. Choose wisely.
Pay attention to prohibitions on assignment and pledging
Factoring is based on the transfer (assignment) or pledging of your receivables. However, your client's general terms and conditions may contain a prohibition on assignment or pledging, meaning you cannot simply transfer your receivable. Check this, as such a prohibition can block or complicate factoring.
Further points of attention
Also pay attention to the notification to your customers (do they know that the factor collects?), the term and termination of the factoring contract, the costs, and privacy regarding the sharing of customer data with the factor. Read the factoring contract carefully before signing, as the terms and conditions strongly determine what you gain from it.
Frequently Asked Questions
What is in it for me through factoring?
Faster payment of your invoices, resulting in better cash flow, and fewer worries about collecting from customers.
Who bears the risk in the event of non-payment?
With recourse factoring, you do it yourself; with non-recourse factoring, the factoring company does. The latter is more expensive but offers more security.
Can factoring be blocked?
Yes, if your client's general terms and conditions contain a prohibition on assignment or pledging. Check this in advance.
Have a factoring contract reviewed?
Our legal experts review your factoring contract and general terms and conditions for prohibitive clauses. View our financial lawteam or schedule a free consultation.
