25 Questions to Ask a Factoring Company Before You Sign

Why ask twenty-five questions instead of three?

A factoring facility is not a transaction, it is an operating relationship that sits between you and the customers who pay you. The funder will file a lien against your receivables, contact your customers, set credit limits that decide which orders you can safely take, and control the account that receives your money. Three questions about rate and advance tell you almost nothing about any of that. The terms that generate most of the regret in this market — minimums, chargeback triggers, notice periods, verification conduct — are never the terms that get asked about on a first call.

The second reason is diagnostic. The questions below are useful because of how they are answered, not only because of the answers. A funder who can produce a written fee exhibit, name your account manager, describe their verification script and quote the exit cost in dollars is a funder with an organized back office. One who deflects with reassurance is telling you something about how your first short-pay will be handled. Ask all of them, in writing, and compare the replies against the agreement before signature.

What should I ask about pricing?

Pricing questions exist to convert a percentage into dollars. Our AR programs run 0.75% to 3% per 30 days against advances of 80% to 95%, factoring 1% to 3.5% at up to 95%, freight 1.5% to 4% flat at up to 97%, and purchase order financing 1.5% to 6% on up to 100% of supplier cost. Anywhere in those ranges, the fee schedule and the day-counting rule move the real cost more than the headline does.

• What is the discount rate, and is it prorated daily, in 10- or 15-day increments, or in full 30-day periods? This is the highest-value question on the list. A good answer is a single unambiguous rule, stated without hedging, that matches the fee exhibit word for word.
• What is my advance rate, and does it vary by customer or by invoice age? A good answer gives one number for most of your ledger and names the specific exceptions, rather than quoting a range you will discover the bottom of later.
• Can I have the complete fee schedule in writing, in dollars? Everything outside the discount rate lives here — application, due diligence, UCC searches and filings, wires, ACH, lockbox, maintenance, portal access, reporting. A good answer is an exhibit you receive the same day, not a promise that the fees are minimal.
• Is there a monthly minimum, and what is it in dollars of fees? Minimums are frequently a fair trade for a lower rate, but only on steady volume. A good answer states the minimum, states what happens in a month you miss it, and is willing to discuss a seasonal waiver.
• When does an aging surcharge start, at what rate, and when is an invoice charged back? These two dates shape your cash flow on any slow-paying customer. A good answer gives specific days and a specific rate, and explains how you are notified before either is triggered.
• What has to change for my rate to improve, and when is it reviewed? Pricing normally improves as a relationship seasons. A good answer names the conditions — clean settlement history, higher volume, lower dilution — and names a review date rather than saying it is always possible to revisit.

What should I ask about the contract?

The agreement outlives the sales relationship. Every one of these questions should be answered by pointing at a clause, and if the answer and the clause differ, the clause is what will govern. Ask for a full draft, not a summary, and read it with the fee exhibit beside it.

• How long is the initial term, and how does renewal work? A good answer is a plain statement of the term, the auto-renewal mechanism and the length of the renewal period, with the clause reference. Indefinite auto-renewal with a short notice window is the structure that traps people.
• Must I finance my entire ledger, named customers only, or can I select invoices? Whole-ledger commitments usually buy a lower rate and remove your flexibility. A good answer explains the trade-off and tells you which one your quote assumes.
• Is this recourse or non-recourse, and what exactly does non-recourse cover? Most non-recourse protection responds to a customer's insolvency, not to a commercial dispute about quality, delivery or price. A good answer states that limitation plainly rather than describing the facility as risk-free.
• What personal guarantee or validity guaranty am I signing? A validity guaranty — in which you stand behind the invoices being genuine — is normal. A full personal guarantee of repayment is a different thing. A good answer distinguishes the two clearly and shows you the document.
• Where will the UCC financing statement be filed, and what does it cover? A good answer explains that the filing is made in your state of organization under UCC Article 9, states whether it is a blanket filing or limited to receivables, and offers to subordinate or carve out other assets where another lender is already in place.

What should I ask about how funding actually works?

Operational questions determine whether the facility solves your problem. A competitive rate on a funder that takes three days to release cash does not help a business that needs to cover Friday payroll, and a cheap facility that demands documents your systems cannot produce will be expensive in staff time.

• What is the daily cutoff for same-day funding, in my time zone? A good answer is a specific clock time and a statement of which transfer method meets it, rather than the phrase same-day with no qualification.
• What documents do you need per invoice, and in what format? A good answer is a short, concrete list — invoice, purchase order, signed proof of delivery or acceptance — and a submission route that matches how your business already works.
• How do you verify invoices with my customers? Verification is the touchpoint your customer actually experiences. A good answer describes the method, how often it happens, and offers to share the script or email template.
• How are customer credit limits set and raised? Your credit limits decide which orders you can take. A good answer explains the review process, typical turnaround on an increase, and who can approve an exception when a large order arrives unexpectedly.
• Who is my day-to-day contact, and what happens when they are away? A good answer is a named person, a direct line and a named backup. A general queue is workable for some businesses and a serious problem for one that funds daily.

What should I ask about credit and collections?

In a notification facility your customers will deal with the funder directly, which means the funder's collections conduct becomes part of your brand whether you intend it to or not. These questions are about protecting relationships you spent years building.

• How is the notice of assignment worded, and when is it sent? A good answer is to show you the actual letter. The best versions read as a routine change of remittance instructions rather than an announcement that you have financial difficulties.
• At what point do you contact my customer about a late invoice, and what do you say first? A good answer describes a graduated sequence that begins with a courteous status inquiry, and makes clear that you are told before any escalation.
• Can I be consulted before a customer is escalated or placed with a collections agency? A good answer is yes as a matter of standard practice, with a defined notice period, rather than a discretion the funder reserves entirely to itself.
• How are short-pays, credit memos and disputes handled? Dilution is where friction lives. A good answer describes how adjustments are reconciled against funded invoices, how quickly you are notified, and how a resolved dispute is unwound.
• What is your experience with customers like mine? Sector knowledge shows in the specifics — progress billing and retainage in construction, rate confirmations and bills of lading in freight, pay-when-paid and prime contractor structures in subcontracting. A good answer uses your vocabulary without being prompted.

What should I ask about getting out?

Exit terms get asked about last and matter first, because they determine whether you can ever reprice. A funder that knows you cannot leave has no commercial reason to improve your terms at renewal, and the cost of exit is the cheapest thing in the agreement to negotiate before you sign.

• What does it cost to terminate in month six, in dollars? A good answer is an actual number worked on your facility size, not a clause reference. Ask for the arithmetic.
• What is the notice window, and how is notice delivered? A good answer is a specific number of days, a specific delivery method, and a clear statement of what happens if the window is missed — usually another full renewal term.
• How are the UCC filings terminated, and how long does it take? A good answer commits to filing terminations promptly after the facility is paid out. A lingering lien will block your next lender.
• What happens to invoices still outstanding when I leave? A good answer explains how the remaining receivables are collected out or bought out, how reserves are released, and when the final reconciliation lands in your account.

What answers should make me walk away?

Red flags in this market are rarely dramatic. They are usually a pattern of vagueness in places where precision costs nothing, and the pattern is more informative than any single answer. If several of these appear together, keep looking — there are many funders, and the underwriting you want is the kind that asks you as many questions as you ask it.

• A rate quoted before anyone has looked at your customer list or your aging report
• Any approval described as guaranteed, or any outcome promised before underwriting
• An unwillingness to put the complete fee schedule in writing ahead of signature
• Pressure to sign today to hold a rate, or a quote that expires within hours
• A refusal to let your attorney or accountant review the agreement first
• Upfront fees payable before any underwriting work has been performed
• A blanket lien on all business assets when only receivables are being financed, with no willingness to discuss a carve-out
• Evasiveness about the termination charge or the notice window
• No named contact, no written verification procedure, and no sample settlement report

How should I run the conversation?

Treat it as procurement rather than as a sales call you are receiving. Three funders, the same written questionnaire, the same deadline, and a decision made against the documents rather than the rapport. That approach also surfaces the operational differences that no rate comparison will show you.

1. 1Send the questions in writing first. Email the full list to each funder before the call. Written answers are comparable, they are attributable, and they tend to be more carefully phrased than anything said on a phone.
2. 2Use the call for follow-ups only. Spend the conversation on the three or four answers that were vague. You learn considerably more from how a hedged answer gets defended than from hearing the prepared pitch again.
3. 3Ask for the documents before you choose. Request the draft agreement, the fee exhibit and a redacted sample settlement report. Read the answers against the clauses and mark every place the two disagree.
4. 4Have the agreement reviewed. A commercial attorney reading a factoring agreement costs a small fraction of a year of fees, and the lien, guaranty and termination provisions are the ones worth a professional eye.
5. 5Negotiate structure before rate. Notice period, minimum waivers during a seasonal trough, free ACH, a receivables-only lien and the chargeback trigger are all commonly movable, and together they are usually worth more than a tenth of a point.