Switching factoring companies can be expensive and difficult. In this article we will review the pros and cons of switching factoring companies. We will also provide you tips on the best way to successfully switch factoring companies.
Switching Factoring Companies: How Do You Do It?
One of the most important things you can do before choosing a factoring company is to do you best to determine whether it is the right company for you. This is because switching factoring companies can be expensive and difficult. There is a complex process involved that includes the old factor relinquishing the right to new invoices from you, as well as the need to change UCC filings and other issues.
However, there are reasons that you might want to change factoring companies after you have established a relationship with one. Here are some of the reasons:
- The old factor is no longer professional.
- Your needs are not being met.
- You find a new factor that charges much lower fees than your current factor.
There might be other reasons. However, before you go about switching factoring companies, make sure you are properly prepared. And carefully check the new factoring company to make sure that this one is really going to be best for your business needs. Continually switching factoring companies can get expensive and time consuming.
Buyout: The new factor must buyout the old factor
By law, you can only have one factoring company at a time. You are not allowed to have more than one factor, since that becomes to difficult to determine who has first right to your company’s invoices. Factoring companies file what is called a Uniform Commercial Code (UCC) in order to establish first right to your invoices. As long as that UCC remains with one factor, it can take the invoices. A second factor would not – even if it were allowed – take second position. That second position would mean that the first factor could take the money from the invoices at any time.
So, before you can go about switching factoring companies, you must first arrange a buyout of the old factor. The new factor has to buyout the old factor, usually using funding from new invoices that you turn over to the new factor. It is sort of like a refinance. When the buyout amount is totaled, the following items are often taken into account:
- Outstanding receivables.
- Fees owed to the old factor.
- Amount in reserve (subtracted from the number).
- Termination or other fees.
Make sure that you get a detailed report of how the buyout amount has been reached. It is important to understand exactly how much you are going to have to provide for the buyout, as well as why you are going to have to provide it. This is very important.
Also, you should be aware that you might have signed a long term contract with a factoring company. A 12 month contract is normal, and you might have guaranteed fees. Consider: If you have an agreement to factor $50,000 a month at 1.9%, that means that the factor is guaranteed $950 per month. If you have a 12 month contract, that means that the factoring company is entitled to $11,400 for that period. If you leave off after 8 months, you still owe the factoring company $3,800, plus whatever termination fees and outstanding receivables might be required. This, of course, will be arranged for the new factor to pay, using funding from new invoices.
New invoices and old invoices provide another point that has to be worked out when switching invoice factoring companies. The two companies have to agree on a point at which the new factor has a right to the invoices. Money collected from old invoices has to be forwarded to the old factor so that they can take their proper fees before sending the money on to your business. The process can get complicated. However, it is possible to make it simpler with the help of Subordination Agreement or an Intercreditor to help facilitate the process of paying of the old factor.
Finally, the filings for the UCC have to be changed. You have to make sure that the right to your business invoices is switched from the old factoring company to the new factoring company, and that everything is done in proper order. This way, the old factor cannot later claim first right to your invoices. Working out a proper agreement can take some time, and meanwhile you need to make sure that your invoices are still being sent out and paid.
Switching factoring companies can be a difficult process. If you have the margin to do it, though, and if you feel that the benefits of a new company would far outweigh the costs of switching, you should initiate the process. Just make sure you consult with the proper people in order to make sure it is done properly.
