Although invoice factoring is a great choice for many different businesses, all invoice factoring companies are not created equal. Sometimes, you may realize that you want to explore other options for your factoring needs. When this happens, one of the main questions we hear is how long will the process take?
If you have decided it is time to switch factors, you may have begun the process of researching different companies to find out your options for new factoring rates and services.
However, it takes a bit more than just choosing a new company to switch factors. There are certain steps that must be performed to release your company from your current contract and enter into a new contract with a new factor.
What is the process for switching factoring companies?
After a company has decided to make the switch to a new factoring company, the following steps must be taken:
- First, you must find a new company that will satisfy your factoring needs and solve any problems you were experiencing with your previous company. Once you choose your new company, you must submit an application and be approved.
- Then you must notify your customers of the pending change of factoring companies and alert them to possible verifications from the new factor.
- Finally, you must notify your existing factor that you have made a deal with a new factor. You will need to ask them to prepare an aging list and a buyout figure for the new factor to take over the account. Simultaneously, you are permitting the existing factor to communicate about your account with the new factor. The two factors will generally be able to handle the matter from there. There will be a buyout agreement between the two factoring companies that you will have to sign as well.
How much time does it take to switch factoring companies?
As you work through this process, the timing will vary depending on a number of factors, including:
- The size of your account
- The number of customers that have to be contacted
- Any unforeseen obstacles that have to be addressed
However, both your existing and your new factoring company will typically try to conclude the process as quickly as possible so the buyout numbers don't change due to ongoing charges from the existing factor.
This entire process usually takes a few days to a week on average, unless there are a large number of unforeseen obstacles to handle.
Things to consider before switching factoring companies
If you are thinking about switching factoring companies, we recommend you consider two main things before making your decision:
- Cost of switching
- Loss of funding
When you switch factoring companies, you will end up paying double factoring charges on all outstanding invoices at the time of the buyout. This means the existing factor has already taken their charges from the outstanding invoices, while your new factor will also be charging for buying out the same outstanding invoices.
Additionally, when you are involved in the buyout process, you should not continue selling invoices to your existing factor or give yourself a deadline date to stop, or the buyout process would never end.
You also cannot begin to sell invoices to the new factor because they do not have rights to your invoices until the buyout is concluded. Because of this, you might not have access to funding during the time that the buyout process is ongoing.
How to prepare for a factoring company switch
If you are aware of some of the consequences of switching factoring companies and are ready to make your switch, we have a few suggestions on how to prepare your business to make the factor switch as painless as possible:
- Notify your customers ahead of time. This can shorten the time it takes for the new factor to complete the verification process since it relies on customer cooperation.
- Choose your timing wisely. We recommend you make the switch at a time when you have the lowest amount of outstanding invoices possible. Not only will this decrease the time it takes for the buyout process, but it will also save you money since you will be paying charges on the least amount of invoices possible.
- We recommend you build up some cash reserve. Since you will not have the ability to fund new invoices during the switch period, having some cash on hand will allow your business to function normally until the procedure is complete.
- Be aware of any penalties that may occur as a result of terminating your contract with your existing factor. Many companies neglect to fully understand the terms of their contract and severely underestimate the penalties or costs associated with early termination of their factoring contract. Be sure you are aware of any penalties, fees, or other costs associated with early termination and be prepared to include those in your cost assessment for switching factors.
Although switching factoring companies may seem like a daunting task, it can be beneficial especially if you are able to get a better rate or better quality of service. When you are considering switching factors, one of the best things we can recommend is to make sure you prepare your business beforehand.
While the timing of the actual process may only take a few days to a week, you must put in time beforehand to notify your customers and build up cash flow for your business to ensure a smooth transition and a successful beginning with your new factoring company.
The best way to make your factoring switch as smooth as possible is by choosing a factoring company that will be the best fit for your business needs. Download our free checklist to ensure you choose the right company and have a smooth transition here: