![]() ![]() Be sure to discuss with the factor how much time your company has to work out disputes with customers before the account becomes a nonapproved account. In addition, if a customer alleges a dispute with respect to a factored account, the factor no longer has the credit risk on the account and the account becomes a nonapproved account. The factor can change or withdraw a credit approval at any time before the goods are delivered to the customer, and, in such cases, the account receivable arising from the sale of the goods becomes a nonapproved account. You will not be able to change any of the terms of sale on an approved account without the factor’s prior written consent, and, in general, you must ship the goods in accordance with the factor’s written approval. Accounts that are not approved or factor risk accounts are referred to as nonapproved or client risk accounts. An account receivable arising from the sale to a customer pursuant to an approved order or under a credit line is an approved or factor risk account. Prior to shipping goods to a customer, you will be submitting the customer’s order to the factor for its approval of the creditworthiness of the customer and the terms of sale. Credit Approvals and Withdrawals and Disputes.Discuss with the factor any accounts that you do not plan to sell to the factor, such as credit card or COD accounts or accounts arising from your sales to specific customers. The factoring agreement will require you to sell all of your accounts receivable to the factor. Following are 10 terms contained in all factoring agreements that you need to review and understand: The factoring agreement is usually 10 or more pages long and may initially seem overwhelming. The factor will then send you the proposed factoring documents including the factoring agreement, personal guarantees (if the factor is making advances), a Secretary’s or Manager’s Certificate (depending on whether your company is a corporation or a limited liability company), a proposed notice to your customers that your company’s accounts receivable have been assigned to the factor, and various related documents and agreements. ![]() This proposal letter usually requires your signature and a deposit. ![]() If a company is obtaining financing from a bank instead of a factor, the bank, the company, and the factor will enter into an agreement stating that monies otherwise payable to the company under the factoring agreement will be payable to the bank.įirst, your company will probably receive a proposal letter (this is not a contract) from the factor containing some, but not all, of the business terms that may be in the factoring agreement. In addition, if the factor approves an order from a creditworthy customer of the company, and the customer thereafter fails to pay the factored account solely as the result of the customer’s financial inability to pay (i.e., due to insolvency or bankruptcy) and not as the result of any type of dispute or other reason, the factor will still pay the purchase price of the account to the company.Ī factor may also provide financing to a company by making advances, prior to the factor’s receipt of payments, against the purchase price of a company’s factored accounts. You are now ready to begin discussions with various financial institutions about factoring your company’s accounts receivable.Ī company and a factor enter into an agreement in which the factor purchases a company’s accounts receivable (such purchased accounts are called factored accounts), collects on the factored accounts, then pays the company the purchase price of the accounts. Your apparel business is doing well and, instead of continuing to use your own financial resources or borrowing from family and friends, you are seeking third-party financing. Arrow Back to Newsroom Factoring Agreements: 10 Essential Terms ![]()
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