A minimum is an amount, in dollars, that a factoring company requires a client to factor in a given amount of time. Occasionally, a minimum can also refer to a minimum number of invoices that must be factored by a client in a given time period. Most factoring company’s minimums are based on a monthly time frame, though differing terms can be used. When a factoring client is in a contract with a minimum, they are agreeing to factor at least the minimum amount within the allotted time, or face a penalty, usually outlined in the factoring contract.
Factoring programs vary from company to company. Each company has structured their factoring programs in an effort to be competitive, fit a desired industry profile, or based on hard-won expertise or experience.
This guide seeks to explain an often used factoring requirement and the potential impacts on factoring client’s business.
As with many facets of a factoring program, the answer to this question varies between factoring companies. For some, a monthly minimum is required to ensure that their internal labor resources, namely account management, billing, and collections groups, are utilized more efficiently. Since the labor required to effectively manage an account does not scale directly as factoring volumes grow, some factoring companies determine a minimum return on investment of their labor that they consider acceptable. Potential clients that are unable to meet this minimum are turned down from consideration for factoring.
Also, a minimum volume might be used in conjunction with a “better than market” factoring fee. Essentially, if a factoring company agrees to give a business a better rate than they would normally merit, a minimum volume may be used to ensure the factoring company makes a reasonable fee from that factoring client.
Enforcement mechanisms for a minimum are generally outlined in the factoring contract, as well as penalties for failing to meet a minimum. Enforcement mechanisms will depend on the penalty for failing to meet a minimum. For instance, a factoring company might prefund a reserve account with the penalty amount and charge that penalty if minimums are not met. Also, a factoring company may choose to extract the penalty from any outstanding invoices after a minimum is not met. Some factors will terminate a factoring contract and cease to factor a client’s invoices if their minimum is consistently missed.
A business must analyze both the costs and the benefits of a factoring program that requires a minimum. In most industries, business invoicing and work varies from month to month, and so a factoring program with a minimum may add additional pressure to a business owner. Since factoring is a financial service that primarily seeks to simplify the process of being paid for work done, the additional pressure of a factoring minimum may negate many of the benefits of consistent and predictable payments.
However, if a company’s volumes are more predictable, or if the minimum falls well within the range of their predicted monthly volumes, then a minimum might be a non-issue. In that case, a company can safely take on a minimum without worrying about potential pitfalls. Either way, this is an important piece of any factoring agreement and a business should be aware of the requirements up front.