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YOU CAN CHECK OUT,
BUT YOU CAN NEVER LEAVE
The Hotel California Syndrome Factoring companies are notorious for writing contracts designed to hide their intent to make it extremely expensive or impossible for you to move to another funding source. Even your attorney may find it difficult to fully understand how seemingly unrelated clauses in their agreement when combined can have a devastating impact on your business. Factoring companies make a lot of money from good factoring clients and will go to great lengths to keep you from leaving...and some even resort to unethical means to do it.
Stop and Think About It
When you sell your accounts receivable to a factoring company you are giving up ownership and control of your accounts receivable. In the eyes of the law the factoring company is the legal owner. This means the factor can do whatever they want with "their" accounts receivable. This legal fact can cause serious financial and legal problems for you and your business if you ever decide to leave your factor. This is why many companies prefer an accounts receivable line of credit because they stay in control by retaining ownership of their accounts receivable.
Protect Yourself
To retain some control and avoid The Hotel California Syndrome you must make sure the following clauses are removed from your factoring agreement: - Minimum Term: Things change, so don't lock yourself into an agreement that you can't terminate whenever you want. Almost every factoring company will remove the minimum term clause if you simply tell them you will not sign an agreement with a minimum term clause. If they won't remove it then negotiate it down to six months maximum. Six months is plenty of time for the factor to recover any set-up cost they may have incurred. If they still won't do it, walk away because the next dozen you contact will.
- Automatic Renewals: If you successfully negotiated the minimum term out of your agreement then the automatic renewal provision should be eliminated as well. Never agree to an automatic renewal, ALWAYS make it subject to your written approval. This is how you stay in control and stop the factoring company from obligating you to something you may or may not agree with.
- Minimum Volume: Never allow a factoring agreement to make reference to the volume of business you are doing. If you allow any sales volume to appear in the agreement you must make certain you process more than that amount with the factor. If you don't, you will be assessed a termination penalty equal to the fees they would have made IF you would have delivered the minimum volume you promised. This mistake could cost you tens of thousands of dollars in penalties. The salesman may tell you they never enforce this clause, DO NOT BELIEVE THEM. The factoring company ALWAYS enforces this clause when you want to move to another funding source or stop factoring.
- Termination Penalties: Again, if you successfully negotiated the removal of the minimum term clause then the termination penalty should also be removed. Never agree to termination penalties of any kind. If your factor will not remove this provision, walk away.
If all of this is confusing or you want to avoid haggling with a prospective factoring company, there is an easier way. Have each prospective factoring company sign our Fair Factoring Agreement BEFORE you sign their factoring agreement. If your factoring company will not sign this agreement - beware!
The Fair Factoring Agreement protects you in two important ways:
- It can reveal the true intent of the factor's agreement.
- It can protect you if their factoring agreement is in conflict with the Fair Factoring Agreement. (The Fair Factoring Agreement should be reviewed by your attorney to make sure all your rights are protected.)
Click here to download and print a copy of the Fair Factoring Agreement.
Are you already factoring? Send a copy of the Fair Factoring Agreement to your factoring company and ask them to sign it. If they won't, ask them to please lower your rate 20% - 7 out of 10 times they will do something for you. Then get with your attorney to plan your escape.
Fair Factoring at a Glance
An easy way to identify safe factoring or A|R finance companies is to look for our Fair Factoring logo displayed on their website and literature.
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