Factoring and Invoice Discounting

6. Before You Sign Up

Once you have chosen a factor, make a detailed check before you commit yourself. Extricating your business from such an intimate working relationship can be complicated and expensive.

6.1 Check, as far as you can, that the factor's performance is likely to be satisfactory.

• Does the factor (and the individual who will be responsible for your account) have experience of your industry?
• How will you communicate with the factor? What reports will you receive? What information will you have to provide? How often will you and the factor meet?
• How quickly does the factor collect debts? How does this compare with your own debt collection performance?
• How flexible will the factor's methods be? What is the factor's idea of 'quick response', in an emergency? What will happen if customers accidentally breach their credit limits? What will happen if you want a customer's credit limit increased?
• What will happen if the factor's performance is unsatisfactory? For example, will you end up paying financing charges for debts the factor has failed to collect?

6.2 Discuss how the factor will handle debt collection.

• When will statements be sent out?
• What happens if a customer disputes an invoice?
• How will the factor pursue overdue debts? What letters will be sent and what phone calls will be made?
• What will happen when a customer's payments are seriously overdue?
• What form will the final reminder letter take and when will it be sent?
• What further action will the factor take to collect overdue debts?
• Will a collection agency be used?
• Will legal action be taken?

6.3 Read the factoring agreement carefully, confirm the terms and conditions for ending the factoring arrangement and make sure they are clear. If in doubt, take legal advice.

• What would happen if you wanted to change factors?There may be a notice period (typically three months) and a fee.
• What would happen if you wanted to alter the services provided by the factor?