Aspects of AR Factoring Term Sheets You Need To Check

One of the great things about account receivable factoring is that you may be offered a term sheet (a document listing all the details involved in the financing) in as little as 24 hours. It’s a welcome departure from the slow loan application process normally used by banks.

Duration of the Financing

Even the most ardent advocate of factoring admits that this method of financing should be only temporary. It’s to be used only as needed. However, some lenders may ask for an extended period of time for factoring so that they actually get a decent return on their investment.

This is called a lock up period, and it can be devastating if you’re required to use factoring for a year or two when you only need it for a few months.

But with some companies, spot factoring which only involves a one-time deal and a single invoice may also be possible.

Advance Rates and Fees

In factoring, you get an advance as a percentage (more or less 80%) and then the rest is forwarded to you minus the factor’s fees when the customer finally pays in full. So to have a viable budget plan, you’ll need a definite idea of the advance rates and the fees. The AR factoring term sheets must explicitly state how much you’ll be getting.

The problem here is when advance rates differ depending on the credit-worthiness of your customers. If advance rates are different each time, what determines the final advance rate?

The fees may also be affected if your customers don’t pay on time. You may have to shoulder the penalties as well, so you’ll need to know the fees involved.

And you also need to know what will happen if your customer refuses to pay. Usually, you may have to return the advance money you received along with additional interest. In non-recourse factoring, the factor doesn’t hold you accountable if the customer declares bankruptcy. But it’s usually a different matter if the customer refuses to pay because of a dispute with your company.

Collection Methods

Factors are usually in charge of collecting fees from your customers. While this may be regarded as a convenient service, it may also be an area of concern. Some factors may employ collection methods which may not sit well with your customers.

Some term sheets specify the kind of letters factors send out to customers when collecting payments, and the frequency of sending out these letters are specified as well. Sometimes the factor may even incorporate your own letterhead or logo on the collection letters so that your customers are unaware that you’re using a factor as a collection agency.


AR factoring term sheets specify every important detail so that you avoid disagreements and confusion later on. The best term sheets try to anticipate every possible contingency so that there’s a planned response for every scenario. Having a factor as backup is often great, but to forge a lasting relationship you need to come up with AR factoring term sheets that are fair to all parties involved.


How to Get Better AR Factoring Term Sheets

Click for a factoring term sheet
Click for a factoring term sheet

If you’ve been turned down by banks on several occasions, an accounts receivable factoring company can be a lifesaver. But you may not like it when you get the AR factoring term sheets they offer. You can do yourself (and your business) a favor by negotiating the term sheet so that you can get a price concession while providing them with what they need to justify their investment.

Here are some tips you need to keep in mind:

Find a Factoring Company that Specializes in your Industry

Each industry has its own regulations, customs, and realities, so you need a factoring company that fully understands how your particular industry operates. That saves everyone a lot of time, and you don’t have to explain why some things are practiced in your industry.

If a lender is already familiar with your industry, then you stand a better chance of getting better terms. The factoring company already knows the risks involved and they will be more likely to offer a better price.

Understand What a Factoring Company is Looking For in a Client

Essentially, a factoring company wants a client who offers them a very low risk with high rewards for their investment. The variables they are looking for will include:

  • Good invoice practices
  • A history of delivering good work
  • An acceptable record in making profits
  • Reputable customers
  • Increasing funding requirements due to growth

Offer a Profile or Summary of your Company

Whether or not a factoring company requires this document, you ought to submit one anyway. It’s not really a lengthy document, as a single page should suffice. The information in the summary should be concise, and of course it has to be factual. It has to answer the following questions:

  • What is your company all about? What does it do?
  • What are your invoicing procedures?
  • What are your funding requirements?
  • What is the outlook for your company in particular, and your industry in general?

The point of the summary is to put your company in a positive light. You can then lower the perceived risk of financing your company by providing the info they need. Don’t include false information, and don’t exaggerate. They will find out and that leads to worse rates.

Manage Your Expectations

One of the most important variables that a factoring company looks for is the volume of invoices you want to factor. When you increase the volume, you can then pay less for every dollar you get in financing. A low risk company with a low volume of invoices may actually have to pay higher rates than a medium risk company with a high volume of invoices.

In short, you can’t just demand better AR factoring term sheets as a matter of course. Factoring companies have their own guidelines, and making unreasonable demands may simply cause you to lose the financing assistance you need. Your responsibility is to make sure that you present the evidence factoring companies want to justify better terms.