Updated 2026-05-19 · By Dana Whitfield

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.

Default provisions in factoring agreements are often broader than a missed payment. They may include false representations on invoices, unauthorized changes to customer payment instructions, customer disputes above a threshold, the seller's bankruptcy or insolvency, tax liens filed against the business, breached covenants, or default under another credit agreement. Reading the full list of default triggers—not just the most obvious ones—is necessary before signing.

A default clause should be read together with the remedies section. The practical impact of a default depends on what the factor can do in response: stop advancing funds, increase the reserve percentage, charge a default interest rate on outstanding advances, require repurchase of all funded invoices, directly contact customers, or call on a personal guarantee. Some agreements provide a cure period—a specified number of days in which the business can correct the triggering condition before remedies begin. Others allow immediate action.

Businesses with existing bank credit should compare the factoring default clause with cross-default language in other agreements. A cross-default clause in a bank loan agreement can transform a factoring default into a bank default. If a chargeback dispute is technically classified as a default under the factoring agreement, and the bank's loan agreement has a cross-default provision, the bank may have the right to accelerate the loan even if the business has never missed a loan payment.

Representations and warranties are a common source of default risk that businesses underestimate. Most factoring agreements require the seller to represent that each submitted invoice represents a legitimate completed transaction, that no dispute or offset exists at the time of submission, that the invoice has not been pledged elsewhere, and that the customer has not been notified of conflicting payment instructions. If any of those representations is inaccurate—even inadvertently—the agreement may treat the misrepresentation as an event of default.

Unauthorized changes to payment instructions are a specific trigger worth understanding. Once a notice of assignment is in place and customers are directed to pay the factor's lockbox, the seller generally cannot redirect those customers to a different account without the factor's written consent. Attempting to redirect customers without proper authorization from the existing factor can trigger a default.

Default charges are typically higher than standard factoring fees. Some agreements specify a default rate applied to the outstanding advance amount from the date of default until the obligation is satisfied. Others specify a flat default fee. Reading the specific charge structure clarifies what a default episode would actually cost and why avoiding even technical defaults through documentation and communication is important.

The cure period provision, where present, is particularly valuable. A 5- to 10-day cure window gives the business time to correct a triggering condition—such as providing missing invoice documentation or resolving a customer communication issue—before the factor exercises remedies. Agreements without any cure period for certain default events give the factor immediate action rights, which shifts negotiating leverage in any dispute.