Account Receivable Factoring Agreement
If you are in business, there are some funding strategies that will help you cover cost of daily expenses without having to rely completely on the outright payment of your clients. By entering an account receivable factoring agreement with a factoring company you trust, you somehow enter into a loan-like agreement which will help you meet day-to-day functions.
So how do you enter into this kind of agreement? Here are some things you need to know about factoring:
- It is an agreement that you enter with a company which usually lasts for a six months to a year. If you need to make the contract longer, you will need to file appropriate extensions. It is also possible to enter into contracts that are renewable every month. Unfortunately, short-term contracts tend to be more expensive.
- This is similar to a bank loan, meaning you will need to apply and fill out some paperwork, for this thing to be settled.
- There are two types of agreements you can enter; one with recourse and one without recourse. The one with recourse will allow you to obtain working capital without having to transfer any risk to the factor. The one without recourse will allow you to obtain working capital and at the same time, transfer certain levels of risk to the factoring company you enter into contract with. Note, though, that when you transfer a risk to another company, the fee you cover will be bigger. To find out which type you should enter, you will need to study your customer’s status.