For many manufacturers and importers, cash flow is a daily juggling act. You’ve delivered your goods, but your customers might not pay for 60 to 90 days, or even longer. Meanwhile, your suppliers, freight companies, and employees need cash today. That gap between delivery and payment can strain even the healthiest business.

That’s where invoice factoring steps in.

Factoring allows you to sell your accounts receivable (your unpaid invoices) to a financing company, called a factor, in exchange for immediate cash. Typically, the factor advances 80 to 95 percent of the invoice’s value right away. When your customer finally pays, the factor takes a small discount, often around 1 to 3 percent per 30 days, and remits the rest to you.

For many manufacturers and importers, factoring provides the lifeline they need to bridge long payment cycles and keep production, shipping, and payroll on track. It’s fast, relatively simple, and doesn’t require giving up ownership or taking on traditional debt.

But while the concept is simple, the contracts are not. Factoring agreements are complex, legally binding documents that determine who bears the financial risk, who controls communication with customers, and what happens if things go wrong.

Before you sign, it’s crucial to understand the fine print. These agreements can have serious long-term consequences if they’re not reviewed and negotiated carefully.

Below are five key provisions that every manufacturer and importer should review before entering a factoring agreement, and how an experienced business attorney can help you protect your cash flow, your customers, and your company’s reputation.

1. Recourse Clauses: Know When You’re Still on the Hook

Not all factoring is created equal. The biggest distinction comes down to whether it’s recourse or non-recourse factoring, and many business owners misunderstand what that means.

In recourse factoring, you, the seller, remain ultimately responsible if your customer doesn’t pay. In other words, if your customer defaults, the factor can require you to repay the advanced funds or deduct that amount from future invoices.

Non-recourse factoring sounds safer because it means the factor assumes the credit risk of nonpayment. However, many “non-recourse” agreements include exceptions, for example, if the customer refuses to pay because of a dispute over the product’s quality, damaged goods, or missing documentation. In these situations, the liability shifts back to you.

A Quick Example

Imagine your company ships $200,000 worth of parts to a major retailer. You sell that invoice to a factor and receive an immediate $180,000 advance. Two months later, the retailer claims the goods were defective and refuses to pay.

Even though your contract says “non-recourse,” the fine print may exclude payment disputes from the factor’s responsibility. You could be forced to buy back the invoice or lose future advances until the issue is resolved.

What You Can Do

Before signing, have your attorney review the recourse language carefully. Ask these questions:

• When exactly am I liable to repurchase invoices?

• What types of customer disputes are excluded from non-recourse coverage?

• Are there time limits or caps on my liability?

Negotiate to limit your repurchase obligations to clear-cut credit defaults, situations where the customer simply cannot pay, such as bankruptcy. This ensures that normal business disputes don’t become your financial burden.

2. Assignment Restrictions: Don’t Breach Your Customer Contracts

Even if the factoring agreement looks great, your customer contracts might prevent you from using it.

Many large retailers, distributors, and government entities include anti-assignment clauses in their contracts. These clauses prohibit you from transferring or assigning invoices to another party, like a factor, without their written consent.

If you ignore this provision and sell your receivables anyway, your customer could argue that they are no longer obligated to pay you or the factor. In some cases, they might withhold payment entirely. Worse, assigning invoices in violation of these clauses could put you in breach of contract with your customer.

A Real-World Example

A California-based importer of food products factored its invoices from a large national grocery chain. Unfortunately, the grocery chain’s supplier agreement contained a clause explicitly banning assignment without prior consent. When the factor notified the chain to redirect payments, the chain’s legal department pushed back, freezing payment until the issue was resolved. The importer spent months and thousands in legal fees untangling the situation.

What You Can Do

Before factoring any invoices, have your legal team:

• Review your major customer contracts for anti-assignment language.

• Identify which customers require consent before factoring their invoices.

• Obtain that consent in writing and keep it on file for the factor.

Some factors will help you navigate this process, but ultimately, you are responsible for ensuring compliance. This proactive step protects your customer relationships and ensures payments aren’t delayed by legal disputes.

3. Customer Contact Terms: Protect Your Reputation and Relationships

When you sell your receivables, the factor usually notifies your customers to redirect payments to them. This process, called notification, ensures that payments go directly to the factor’s account instead of yours.

While this may sound harmless, how the factor communicates with your customers can have a major impact on your brand and business relationships. Poorly handled notifications can cause confusion or even alarm customers who think your company is in financial trouble.

The Risk

Imagine a loyal customer receiving a formal notice from an unknown financing company demanding payment to a different account. If it’s not communicated properly, they might assume your company is struggling financially or facing bankruptcy. That perception can quickly spread, damaging your reputation.

What You Can Do

Negotiate customer communication provisions in your factoring agreement. Specifically:

• Require that all customer notifications be pre-approved by you or your counsel.

• Ensure the tone and wording of the notice are professional, transparent, and brand-safe.

• Include a clause that the factor must consult with you before contacting any customer directly.

For example, a good notification letter might read:

“As part of our standard financing arrangements, please note that future payments for invoices from [Your Company Name] should be made to [Factor Name]. This change allows us to process your orders more efficiently. Thank you for your continued partnership.”

This approach reassures your customers that factoring is a standard business tool, not a red flag.

Maintaining consistent communication and brand trust is essential, especially for importers and manufacturers who rely on repeat orders and long-term contracts.

4. UCC Filings and Lien Priority: Avoid Collateral Conflicts

Here’s one of the most commonly overlooked issues in factoring agreements: UCC filings and lien priority.

Even though factoring is technically a sale of receivables, most factors file a UCC-1 financing statement under Article 9 of the Uniform Commercial Code (UCC). This filing gives public notice that the factor has an ownership interest in your receivables.

That’s standard practice, but it can cause problems if you already have other secured financing.

Why This Matters

Let’s say your business also has a line of credit with a bank. Most bank loans include a blanket lien that covers all your accounts receivable and inventory. If your factor files a new UCC-1 on those same receivables, the two filings may conflict.

The result? You could violate your bank loan’s covenants or trigger a technical default. Worse, in the event of a dispute or bankruptcy, the question of who has first priority over your receivables could turn into an expensive legal fight between the factor and the bank.

A Common Scenario

A Los Angeles electronics importer factored $1.5 million in invoices while maintaining a $2 million credit line with their bank. The bank had filed a blanket UCC-1 years earlier. When the factor filed its own, the bank flagged the conflict and immediately froze the company’s line of credit until the issue was resolved. The company lost vital working capital for weeks.

What You Can Do

Before you sign a factoring agreement, have your attorney:

• Review all existing financing documents to identify current liens.

• Coordinate with your bank and the factor to create an intercreditor agreement defining lien priority.

• Ensure that the factor’s filings are properly limited to specific receivables rather than all assets.

This coordination prevents costly disputes and protects your access to other forms of financing. It also ensures that your working capital strategy remains flexible and sustainable.

5. Default Triggers: Watch Out for Hidden Risks

Factoring agreements often include broad default provisions that go well beyond actual nonpayment. Some factors define “default” so broadly that minor administrative issues can give them the right to accelerate repayment, withhold funds, or terminate the agreement.

Common Default Triggers Include:

• A delayed shipment or missing invoice documentation.

• A customer dispute over product quality.

• Late submission of a report or financial statement.

• A decline in your credit rating or a change in ownership.

Even if your business is fundamentally sound, these “technical defaults” can give the factor leverage to demand repayment or hold back funds.

Example

A mid-sized manufacturer in Texas missed its monthly reporting deadline by two days due to a staff shortage. The factor classified this as a default, froze future advances, and began offsetting past invoices. The business scrambled to restore operations and lost valuable production time.

What You Can Do

When reviewing your agreement, pay attention to:

• How “default” is defined. Narrow it to true payment failures or insolvency events.

• Cure periods. Negotiate for a minimum of 5–10 business days to correct administrative issues before a default takes effect.

• Acceleration clauses. Make sure repayment can only be accelerated for material breaches, not minor infractions.

Your goal is to ensure that normal business hiccups don’t threaten your financial stability. A well-drafted contract should protect both parties, not give one side the power to shut down your operations over paperwork.

Final Thoughts: Factoring Should Strengthen, Not Endanger, Your Business

Factoring can be a powerful cash flow solution for manufacturers and importers. It transforms your receivables into immediate working capital, allowing you to pay suppliers, cover payroll, and invest in growth, all without taking on new debt.

But like any financial tool, its benefits depend entirely on the terms of the agreement.

The wrong contract can expose you to hidden liabilities, strain customer relationships, and even jeopardize your access to other financing. The right contract, on the other hand, can enhance liquidity, stability, and growth potential.

Before You Sign

Take time to:

1. Review the recourse provisions carefully to understand your true liability.

2. Confirm that your customer contracts allow assignments.

3. Protect your customer relationships through thoughtful communication terms.

4. Resolve any lien or priority conflicts before closing.

5. Tighten default definitions to avoid unnecessary risks.

At Carbon Law Group, we help manufacturers, importers, and growing businesses structure and negotiate factoring and trade-finance agreements that protect their interests. Our goal is to give you confidence in every deal, clarity in your contracts, and control over your working capital.

In manufacturing and trade, cash flow keeps you operating, but the contract determines who stays in control.

👉Take the next step book your consultation today and safeguard your brand’s future.

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