Collection Factoring Agreement

Summary

This template is a collection factoring agreement used typically by retail companies to sell accounts receivable to a factor at the time of collection from the account debtor. Sometimes such retail companies also shift credit and collection functions to the factor. This template contains practical guidance, drafting notes and alternate and optional clauses. A factoring agreement is a transaction whereby a company sells its accounts receivables to another party, referred to as a "factor." The selling company is able to receive cash for use in its business, rather than waiting for payment on the accounts receivable and may benefit from collection services by the factor. The terms of factoring agreements vary as to when the sale is effective, which accounts receivable are sold, whether the factor has recourse to the seller for nonpaying accounts receivable, whether account debtors know about the factoring arrangement, as well as other terms. The variations depend on the nature of the seller's business, the need for cash flow and/or collection services, and the price the factor is willing to pay, and the seller is willing to accept, for the accounts receivable. In a collection factoring arrangement (also sometimes referred to as a retail factoring agreement), the selling company typically offers all of its accounts receivable to the factor for purchase. The factor then makes a credit determination with respect to each account receivable as to whether the factor will take the risk of non-collection or leave the risk with the selling company. The factor pays the purchase price for the accounts receivable at the time the accounts are collected or deemed collected. Typically, in this type of factoring agreement, the factor charges factoring fees, commissions or other fees or finance charges. The capitalized terms used in this template should be conformed to the defined terms in other relevant agreements between the parties. This template should be read in conjunction with the practice note Factoring Transactions and Collection Factoring Agreements. For a sample advance or discount factoring agreement, see Advance Factoring Agreement. For a full listing of key content covering asset-based lending, including agreements, security, guaranties, perfection, and priorities, see Asset-Based Lending Resource Kit.