You've chosen a factoring company, but you're not happy with the results. Switching factoring companies is one option, but it can cost you. Find out how much it will cost to switch factoring companies so you aren't caught unprepared.
Will I Be Without Financing When I Switch Factors?
As a general rule, you should expect a certain amount of downtime when your business transitions from one factor to another. The amount of downtime you experience is based on the factoring companies you are working with and on the individual client, but it's typical to plan for a few days' worth.
You can reduce the amount of time you must go without financing by choosing a new factoring company ahead of time.
If you are looking to switch due to poor experiences with your current factor, you'll need to articulate what isn't working about the relationship and how another factor can better serve your company's needs. Then you'll want to find a factor that is better suited to serve your business and offers favorable terms.
At UC Factors, we always stress that companies that are looking to switch for service complaints understand that normally the lack of service is usually associated with the lower factoring rate being paid. A factoring company's largest expense is payroll for their staff; because of this, it's hard to pay for quality team members when you are charging rock bottom rates.
Therefore service might be compromised since team members are not as qualified and not seasoned factoring specialists. We recommend companies take this into consideration when looking for a new factor since a higher quality of service will typically accompany a higher factoring rate. At UC Factors, we pride ourselves on providing outstanding service with competitive rates.
Once you've chosen a new factor, you'll need to apply to be a client of the new factoring company, which paves the way for a smooth path to the buyout. Once you have established a relationship with the new factor, they can assist you with the buyout process.
At UC Factors, we strive to expedite the buyout to reduce the disruption in invoice processing, so you experience as little downtime as possible.
When you do all of this prep work before informing your current factor that you want to switch, you will reduce the time you must go without financing.
What is the Cost of Switching Factors?
To determine how much you will pay to switch factors, you can think about it this way:
- The current factor will calculate their charges right up to the day of the buyout, plus any cancellation fees. These will be listed in your contract.
- The new factor will charge their own factoring fees on the same accounts that are being bought out, in accordance with the new agreement.
- Thus, you will be paying twice for every factoring charge on open accounts, plus any cancellation fees associated with your present factor. While UC Factor does not charge a fee to create a new account, other factors often charge account set up fees.
By calculating the fees and factoring charges for all open accounts, you can determine the total cost to you of switching factors.
Be sure to include in this number any penalties or fees associated with breaking your contract with your current factoring company as well. While the initial financial hit can sting, it is worth it in the long run if the new factor offers lower rates and better customer service.
If the cost of switching factors is more than you want to pay, you can always check when your current contract expires.
You have the option to wait until your contract expires and then switch factors, although this means putting up with a less than satisfactory factoring experience until the contract concludes. Remember to give your notice in time, most contracts call for a 30-90 day notice of cancellation before your contract renews.
Can I Continue to Receive Funding from a Factor During the Switch to Offset Costs?
In order to switch companies quickly, you must cease factoring with the existing company and move forward with a buyout. The factoring company you're currently contracting with will need to relinquish their priority UCC-1 lien on present and future accounts receivable, and they only do this when a new company agrees to buy all your existing invoices with them.
Likewise, a new factoring company won't want to buy invoices unless they can assume priority UCC-1 lien position through a structured buyout agreement.
Given that invoices will halt processing until the buyout concludes, you are probably wondering how long the process takes. There's no standard answer since every situation is unique.
Both Factoring companies must perform a lot of due diligence tasks to complete a buyout. With each step, there's a lot of paperwork and administrative time involved in a takeover.
If a factoring company assigns an unexperienced team member to handle the buyout, it could take even longer to process. This is why UC Factors only allows Managers to work on buyouts, both for current and new clients. Typically, the company taking over the account has more of the work load than the current factor. The takeover factor has more to gain from the buyout than the current factor, so the work involved is justified.
Having an experienced, capable factoring company handling the transaction makes a huge difference since you can be confident that they will provide you with knowledgable team members that will make the transition smooth for you and your company.
The size of the buyout plays a role in processing time, too. Before a new factor will buy in, they must first verify the invoices are valid, check account debtor credit, and review the buyout figure. If you have a lot of invoices, it takes longer.
While this process is occurring, your company will be left without funding. We recommend preparing for this period by storing up some cash to cover any necessary business expenses that might take place during this time so you won’t struggle during the transition period.
While you should not continue with a factoring company that cannot meet your business's needs, you should not switch on a whim, either.
Your business must be prepared before you can change factors. You must be able to absorb the cost of changing contractors, and you must be able to find a new factoring company who can meet your business needs. When you can feel confident in your factor, then the switch will have been worthwhile.
One of the most important parts of switching factors is making sure you choose the right company for your new factor. Download our free checklist to ensure you follow all the steps necessary to choose the right factor and have a smooth transition here: