How to Switch Factoring Companies

Factoring

Reasons for Switching

There are a variety of reasons why a company may consider switching factors. Maybe your factor doesn’t have good customer service – they’re not picking up the phones or they’re treating your customers poorly. Perhaps your factor isn’t funding your invoices in a timely manner. Or, maybe you found another factor with better advance rates and lower fees. Regardless, if your needs are somehow not being met, you may be ready to switch factors. But where do you start?

Leaving Your Current Factor

You need to determine when your contract ends with your current factor and what fees may apply if you terminate early. Your contract term can normally be found under the “Termination Clause” section of your factoring agreement. You need to consider the fees associated with switching before committing to the change.

Once you’ve decided to leave your current factor, you will need to give notice. All factoring companies require written notice to terminate the contract. The expectation is usually 30 – 60 days prior to the renewal date. You will need to verify whether your notice to terminate needs to be delivered via mail or if electronic notice is acceptable. 

The Cost of Switching

When you decide to switch, the new factor buys the invoices originally purchased by the old factor. This means the new factor must pay whatever the old factor already advanced, plus any fees accrued to this point. The new factor will usually collect those fees from the customer (you) from invoices you submit once the switch is made.

Sample Contract $50,000 in invoices per month | 2% | 12 months | 90% advance rate

  • No Fees: If you have $50,000 in open invoices, an advance rate of 90 percent and no fees, your buyout should be $45,000. The new factor will wire the old factor $45,000 and will then instruct your customers to pay the new factor.
  • Guaranteed or Non-Compliance Fees: If you have an agreement to factor $50,000 in invoices per month at 2%, your factor is guaranteed $1,000 per month. If you have a 12-month contract, your factor is entitled to $12,000 over that period. If you leave your factor after 8 months, you will owe $4,000 in guaranteed fees. This is typically added to your buyout amount.
  • Early-Termination Fees: The old factor may charge an early termination fee. If your new factor owes the old factor $45,000 for your invoices and the old factor also charges a $1,000 early-termination fee, the new cost of the buyout is $46,000.
  • Buyout Fee: The new factor may charge a buyout fee for moving the invoices over from the old factor. Typically, it’s 1 - 1.5% of the total buyout cost. If your total buyout was $45,000 and the buyout fee is an additional 1%, the cost is $450.

The Buyout Process

Once you submit notice, the new factor will reach out to your old factor to start the buyout process. The old factor must first agree upon a buyout date. The new factor will then take several steps to prepare for that date:

  1. The new factor must verify the current aging report, which is a report that shows all the customer invoices the old factor currently has open. They will contact your customers to confirm the invoice was received and to ask for the scheduled date of payment.
  1. After a certain portion of the aging has been verified, the buyout agreement will need to be signed by all three parties – the old factor, the client (you) and the new factor. The agreement will list the buyout amount, which will then be wired to the old factor from the new factor.
  1. Once the buyout wire is received, the buyout transaction is complete. The new factor will terminate the old factor’s UCC filing. Additionally, they will request a release letter from the old factor. This letter can be used to show your customers that payment must now be made to the new factor. You will also receive a notice of assignment from your new factor to include on all your factoring invoices.

Commonly Asked Questions

Will I be involved in the buyout process?

Most of the communication in the buyout process takes place between the old factor and the new factor. You may need to get involved if the new factor has trouble reaching a debtor for verification or needs copies of invoices to complete verification calls. 

Will I be without funding?

Once the buyout process starts, there is a possibility that your funds will be held by either the old factor or the new factor to ensure that aging remains accurate and the buyout agreement stays the same.

What if a payment is made to the old factor once I’ve switched to new factor?

Per the buyout agreement, the old factor is contractually obligated and required by law to forward any payments received to the new factor.