What to Expect When Switching Factoring Companies

What you should expect from switching invoice factoring companies

Don’t let your current factoring agreement fool you. Switching factoring companies is not necessarily a complicated or expensive process. In fact, we help businesses do it every day when they want to save money, get paid faster, or improve the payment experience for their clients.

Below, we’ll go over some of the most common reasons businesses switch to a new factor, answer FAQs about switching factoring companies, and provide you with a checklist to make your transition easier.

Why People Switch Factoring Companies

First, let’s look at some of the most common reasons businesses have for switching factoring companies.

Cost

The cost of invoice factoring will vary from one company to the next. Although a small difference may not seem like much at the onset, it can really add up as your invoice value increases or the number of invoices you factor grows.

Hidden Fees

Each factor has its own fee structure, so the fees charged and the amount of each vary. Some examples of unexpected or hidden fees businesses are charged include:

  • Application Fees
  • Setup Fees
  • Credit Check Fees
  • Customer Service Fees
  • Processing Fees
  • Disbursement Fees
  • Minimum Volume Requirement Fees
  • Cancellation Fees
  • And More

Like the cost to factor, hidden fees can add up and eat into profit.

Low Initial Advance

Factors often start businesses on lower advance rates by either setting caps on amounts or offering a low percentage of an invoice’s value. It can be difficult to pay daily expenses and invest in growth when a business isn’t getting maximum value for its invoices.

Slow Payments

Sometimes factors fail to meet the timelines they promise. “We would, at times, not get funded on critical days like payroll day,” says Cold Way Transportation owner Javier Delgado, reflecting on his prior experiences with factoring. Issues like this can damage employee relationships, cost businesses their best team members, and diminish growth.

Heavy-Handed Collections

Your factoring company will generally collect payments from your clients. This can be a major benefit when the factor delivers great customer service and makes it easier for your clients to pay. However, some factors use strongarm tactics to get clients to pay. They may say they’ll send them to collections or threaten them with other legal actions. This hurts the client relationship and may result in lost business or contract terminations.

Not all factoring companies behave this way. Some, like Viva, offer white glove customer care and treat your customers like they’re their own. Rather than simply seeing collections as a financial transaction, they view each interaction as an opportunity to help strengthen your relationships so your business grows stronger too.

Slow to Apply Collections

Credit should be applied to a customer’s account quickly when they pay. That keeps your costs lower and typically means you can factor another invoice, so you can accept a new order and move your business forward. However, some factors hold funds longer than they need to or are slow to credit accounts.

Lack of a Good Working Relationship

Some factors see their arrangements purely as financial transactions. They’re purely looking at how they can earn their next dollar. That type of relationship is fine for some businesses that prefer a hands-off approach. However, many business owners appreciate a personal touch and thrive even more when a factoring company invests in their organization’s success.

“The right factoring partner, like Viva Capital Funding, doesn’t just give you money, they give you knowledge on your industry,” says Alisa Applewhite, owner of  Top of the Line Healthcare Staffing. In less than a year, her revenue has grown more than 1,000 percent, which she attributes to the strong relationships she built with Viva and the service she receives.  

FAQs: Common Concerns When Switching Factoring Companies

Want to switch factoring companies, but have concerns about the road ahead and what it means for your business? Below, we’ll go over some FAQs to help demystify the process.

Will My Factoring Contract Force Me to Stay with My Factor?

Each factoring contract is different. For example, some factors lock you into a one-year contract, while others require you to stay with them for two or more years. Some contracts also auto-renew without giving you notice, which means you’re locked in for another term if you miss your cancellation window.

Check your contract to see the term you agreed to. If you’re coming up on renewal, you can typically exit the contract without penalty. If you’re locked in for months or years, you’ll have to follow other avenues to end the agreement early.

What Are My Options for Getting Out of My Factoring Contract?

The options for getting out of a factoring contract will vary depending on the terms you signed. Look for the “Termination Clause” in your current agreement for your specifics.

For example, some contracts have “guaranteed fees.” If you agree to pay a certain minimum each year, you’ll need to pay the difference between what you agreed to and what you’ve already paid to end your contract. There may also be buyout or early-termination fees.

If you don’t have any outstanding invoices with your current factor, you can typically pay any related fees and end the contract. However, if you have outstanding invoices and can’t pay back the balance right away, you’ll typically work out a buyout agreement with the old and new factoring company.

How Does the Buyout Process Work When Switching Factoring Companies?

Your old and new factoring companies will usually manage the buyout process for you, but it typically involves the following steps.

  • You inform your old factor that you’re switching factoring companies.
  • The new factor contacts the old factor and agrees on a buyout date.
  • The new factor verifies the current aging report. This entails seeing which accounts still appear to have open invoices and contacting each customer to verify the date they received the invoice and when the payment date is scheduled.
  • You and both factors sign the buyout agreement, which lists the buyout amount. The new factor wires payment for the buyout amount to the old factor.
  • Once payment is received, the UCC filing for the old factor is terminated, and filing for the new factor is created. The old factor also creates a release that the new factor can use to show customers where to remit payment. Your new factor will also provide you with a notice of assignment to include on your factoring invoices.

How Long Will It Take to Switch Factoring Companies?

You can switch factoring companies in less than a week if things go smoothly. However, sometimes it can take a couple of weeks or longer because the factors must agree on the best way to settle the accounts. You should plan for it to take longer so you’re prepared for any gaps.

Will I Be Without Financing for a While if I Switch Factoring Companies?

There is usually a funding gap when you’re switching factoring companies. Your old factor can’t accept new invoices because your new factor is buying out the agreement based on what was open when you began the buyout process. Your new factor can’t accept invoices because the law states you can only work with one factor at a time. If you rely on funding for things like payroll and must have cash at a specific time each month, you’ll either need to set aside cash to get through the transition or plan your buyout for a time that minimizes the chances that you’ll be without cash at a crucial time.

How Much Will Switching Factoring Companies Cost Me?

It’s technically possible to switch factoring companies without any out-of-pocket expenses. However, most businesses will need to set aside a little cash for the transition.

For example, let’s say you have $50,000 in outstanding invoices, no fees due on them, and your current factor will fund the full amount. You can switch at no cost to you.

However, there will probably be a small balance left from the factoring buyout, and additional penalties or fees may be applied to the buyout cost, which the new factor may or may not cover for you.

What Are the Penalties and Fees?

Some of the following fees may apply:

  • Buyout Fee: Sometimes, your new factor will charge a fee for moving over your accounts and invoices. It’s usually 1.0 to 1.5 percent of the total buyout cost. For example, if the buyout is $50,000 and your buyout fee is 1.5 percent, your buyout fee is $750.
  • Early Termination Fees: If your termination agreement indicates you have an early termination fee, it will be applied to the total buyout cost.
  • Guaranteed or Non-Compliance Fees: If your current factoring agreement stipulates that you’ll meet minimum monthly requirements, you’ll be required to pay this off as you exit the contract. For example, let’s say you’re required to pay a minimum of $1,000 per month in fees, and you have six months left of your contract. An additional $6,000 will be added to your buyout costs.

Will There Be Enough Money for the Switch?

You should set some extra cash aside. Check your current contract and talk to your new factor to better understand what to expect.

Do I Need to Tell My Customers That I am Switching Factoring Companies?

Your old and new factors will take care of notifying your customers for you. However, you’ll need to update the address on your invoices to reflect the new factor’s information.

How Can a New Factoring Company Help with the Transition?

Your new factoring company can help you by guiding the buyout process so it goes as smoothly as possible, informing your clients of the switch, and keeping you in the loop about what to expect at each step.

Checklist: What to Do When Switching Factoring Companies

1. Review Your Current Contract

Examine the termination clause carefully to learn about your obligations.

2. Find the Best Factoring Company for Your Needs

Get to know any new factoring company you’re considering. If you’re not sure how to choose a factoring company, pay special attention to things like:

  • Speed of Funding
  • Access to Account Managers
  • Advance Rates
  • Penalties and Fees
  • Contractual Commitment
  • Services Offered in Addition to Funding
  • Familiarity with Your Industry
  • Buyout Process and Costs

Request a consultation to find out what the buyout process looks like and what terms they’ll offer. Then, sign up when you find one you like.

3. Notify Your Current Factor

Let your current factoring company know that you’re switching.

4. Grant the Necessary Permissions

Both companies will need your permission to share data. They’ll need to work together to create a buyout agreement and set a buyout date.

5. Wait

Give the factors time. It can take days or weeks to create the buyout agreement and for the buyout date to arrive.

6. Inform

Update your invoices to reflect the new payment address. If your factors aren’t informing your clients about the switch, you’ll need to let them know instead.

Switch to Viva’s Invoice Factoring Program

With decades of experience, competitive rates, fast funding, and industry expertise, Viva can make your factoring switch and ongoing funding a breeze. To learn more about switching to Viva, request a complimentary funding estimate.

Armando Armendariz
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About Armando Armendariz

Armando Armendariz, Director of Business Development and Partner of Viva Capital, facilitates new business, establishes referral partner relationships and oversees sales—over 15 years of experience in banking, finance, and business entrepreneurship.

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