{"id":185703,"date":"2024-01-12T01:22:32","date_gmt":"2024-01-12T01:22:32","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=185703"},"modified":"2025-07-02T00:37:25","modified_gmt":"2025-07-01T23:37:25","slug":"legal-considerations-factoring","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/legal-considerations-factoring\/","title":{"rendered":"Key Legal Considerations When Factoring"},"content":{"rendered":"\n

Factoring is a financial arrangement where a startup sells its trade receivables to a specialised financial institution called a \u2018factor\u2019 in exchange for immediate cash. It is advantageous for startups that need help with cash flow management and efficient debt collection systems. This article explores the key legal considerations that startups should consider when entering into factoring agreements<\/a>.<\/p>\n\n\n\n

Understanding the Factoring Agreement <\/h2>\n\n\n\n

A factoring agreement is a contract between your startup and the factor. The factor agreement will specify the terms of the relationship and the obligations and rights belonging to you and the factor. <\/p>\n\n\n\n

The following sections explore key terms to include in your factoring agreement.<\/p>\n\n\n\n

Sale and Purchase of Receivables <\/h3>\n\n\n\n

A factoring agreement operates by you selling to the factor the receivables on your balance sheet. The default position is that the factor purchases all of your trade receivables. However, there may be certain receivables you do not wish to sell. For instance, certain customers may pay upfront via credit card. Depending on the payment terms, these payments may exist as a trade receivable for a short period (two to three days). However, you may conclude it is not practical to sell these receivables at a discount to the factor. <\/p>\n\n\n\n

Fees and Charges<\/h3>\n\n\n\n

Startups should carefully review the fee structure and any additional charges associated with the factoring arrangement. It is essential to understand the costs involved to evaluate the financial implications for the startup. Most factoring agreements operate by reference to your yearly revenue. For startups, factors usually discount this amount by 80-85%.<\/p>\n\n\n\n

Recourse and Non-Recourse Factoring<\/h3>\n\n\n\n

Recourse refers to the factor\u2019s obligation to assume liabilities for bad debts. Under a non-recourse factoring agreement, the factor takes liability for the unpaid debts. This means that you will not have to repay any money to the factor if a customer defaults. However, this comes at an additional cost to you. <\/p>\n\n\n\n

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Recourse factoring means that your startup will incur the expense of writing off a bad debt.<\/p>\n<\/div>\n\n\n\n

Regulatory Compliance Considerations<\/h2>\n\n\n\n

Startups engaging in factoring must ensure compliance with relevant regulatory requirements. Specifically, you should consider:<\/p>\n\n\n\n