Understanding What Factoring Agreements Can Do for Texas Businesses

A factoring agreement is a powerful financing tool for Texas businesses seeking immediate cash flow. Under a factoring arrangement, a business sells its unpaid invoices (accounts receivable) to a third party, known as the "factor," at a discount. The factor then assumes responsibility for collecting the debts directly from the business's customers. This effectively accelerates cash that might otherwise be tied up for 30, 60, or even 90 days, providing vital working capital without taking on traditional debt.

In Texas, these transactions are primarily governed by Article 9 of the Texas Uniform Commercial Code, specifically concerning secured transactions. While factoring agreements are sales of assets, the law treats them similarly to a security interest in accounts receivable for the purpose of ensuring the factor's rights are legally protected against other creditors. A crucial step for a Texas factor is to "perfect" their interest, typically by filing a UCC-1 financing statement with the Texas Secretary of State. This public filing provides notice to other parties that the factor has a claim to those specific receivables.

The written agreement itself is a comprehensive legal document that outlines the terms of the sale. Key components include the "advance rate" (the percentage of the invoice value the business receives upfront, typically 70-90%), the "discount rate" (the factor's fee), and the "reserve account" (the portion withheld until the final payment is collected). It is essential that a Texas business understands whether the agreement is "recourse" or "non-recourse." In a recourse agreement, which is common, the business is obligated to buy back any invoices that the factor is unable to collect, meaning the business retains the ultimate risk of bad debt. A non-recourse agreement shifts the risk of customer non-payment to the factor (with specific exceptions for disputes).

Texas law also addresses critical aspects like warranties and representations, ensuring the seller guarantees that the invoices are valid, undisputed, and clear of other liens. Given the legal complexities and financial implications, any Texas business considering this form of financing should carefully review the proposed contract with legal counsel to ensure compliance with state law and fully understand their obligations. A well-structured factoring agreement can be a strategic financial tool for managing cash flow effectively in the competitive Texas market.

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