Default clauses in factoring agreements
Default clauses define events that can let a factor stop funding, accelerate obligations, charge default fees, or exercise collection rights.
- A default can be triggered by more than non-payment.
- Remedies may include funding suspension, increased reserves, repurchase, collection action, and default charges.
- Cross-default clauses can connect the factoring agreement to other credit agreements.
- Ask for a plain-English list of default events and remedies before signing.
Default provisions are often broader than a missed payment. They may include false representations, unauthorized changes to payment instructions, customer disputes, bankruptcy, tax liens, breached covenants, or default under another credit agreement.
A default clause should be read together with remedies. The practical impact depends on whether the factor can stop advances, increase reserves, charge default interest, require repurchase, contact customers, or enforce a guarantee.
Businesses with existing bank credit should also compare the factoring default clause with cross-default language in other agreements.
Clause example
Default language may state that a seller is in default if it redirects customer payments away from the approved lockbox or collection account. The exact wording controls.
Default review table
| Provision | Review point |
| Event of default | What conduct or condition triggers default? |
| Cure period | Is there time to fix the issue before remedies begin? |
| Default rate | Does an extra charge accrue after default? |
| Remedies | Can funding stop or invoices be charged back? |
Cross-default risk
If another credit agreement treats a factoring default as its own default, one contract problem can spread. Review existing bank or equipment finance agreements before signing.
Related reading
Sources
- Uniform Commercial Code Article 9 - Uniform Law Commission. Accessed 2026-05-19.
- International Factoring Association - International Factoring Association. Accessed 2026-05-19.
- Secured Finance Network - Secured Finance Network. Accessed 2026-05-19.