How to Terminate Your Existing Factoring Contract to Switch Factors

Whether your current factor is simply not working out well for your company or you want to make a switch to another factor that is better aligned with your goals, learning more about terminating your initial contract can help you avoid some common pitfalls.

When you switch factors, you’ll need to end the work with your original factoring company and launch with the new one; during this time, you’ll need to take several steps and both factoring companies will work on your behalf to make the transfer work. Understanding what is involved when you stop working with a factoring company can help you successfully navigate this process and ensure you the best possible transition for your organization.

 

What is Contract Termination?

Switching factoring companies is not something that should be done often. Hopping from factoring company to factoring company is typically frowned upon and should only be done if circumstances demand it.

However, if you have performed your research and have determined switching factors before your contract has ended is the best option, you will need to begin to take the steps to terminate your contract.

To do this, you’ll need to notify your existing factoring company and bring your contract with them to a close. You have a contract in place; that contract will dictate the terms of the process and you should follow it to avoid disruption or other issues.

 

Termination Requirements and Penalties

For many factoring company contracts, a notice of anywhere from 30 to 90 days is required for notice of termination. This gives the company time to prepare for the transition and allows your new factor to be ready to take over. Your transition arrangements with your new factor should be completed during this timeframe, and they should be ready to take over at the conclusion of this period.

Your new contract won’t become valid until your old one ends and all obligations have been satisfied. In some cases, there may also be penalties involved; your original factor may charge a penalty if you end your contract prematurely.

If your contract term is approaching the end (often after a year of service), timing your notice period to coincide with the end of the term can help you avoid penalties and fulfill your obligations. Alternatively, if only a short time is left, the penalty will not be large and may be worth paying if you want to move forward more swiftly.

 

How to Terminate a Factoring Contract, Step by Step

While each contract is unique, they all follow the same general process when it comes to termination. You should read your contract thoroughly before proceeding, and then follow these steps to terminate:

  1. Find a new factor with more beneficial terms and ensure you qualify for service with them; do this first so you never risk going without factoring.
  2. Give your original factor the amount of notice outlined in your contract.
  3. When the notice period has ended, provide your existing factor with a letter of permission that allows them to communicate with the new factor to resolve and transfer your accounts. This allows them to send your new factor needed information, ranging from lists of your accounts receivable and a total figure for buyout (the amount needed to close out your accounts and make the switch)
  4. Stay in contact with the new factor throughout the process to ensure any questions about your customers or accounts can be answered quickly.

 

How Much Help Can You Expect from Your Original Factor?

The original factor has contractual obligations to fulfill during the closeout process; you can rely on them to follow the contract when it comes to termination.

Some factors willingly go beyond what the contract specifies to make sure you have a seamless transition, others do not. In most cases, your new factor and your own proactive approach are more reliable as your original contract winds down.

 

The Transition Period Explained

When your initial contract is terminated, what happens to your payments, charges, customers, and invoices? These items are covered as part of the process and as long as you legally terminate your factoring contract, will be taken care of by the original and new factors on your behalf.

The original factor will sign a Release Letter stating that the change has occurred and future payments should be sent to the new factor and the new factor will distribute the letter as needed to the customers. Any of your customers that have open or active invoices and that owe you money will be sent this letter. This provides notice for your customers that a change has occurred and prevents them from sending payment to the wrong place.

If your original factor still receives payments for your accounts, they will forward them to the new factor; this is a relatively common occurrence and should be covered in the buyout agreement. This allows for all invoices after the Buyout date to be handled by the new factor without worry about receiving payments on old and new invoices.

Make note that all Buyout Agreements are written differently, some call for the old factor to only send payments on the Buyout invoices only, some call for all invoices.  If your Buyout agreement calls for Buyout invoices only, any payment received by the old factor not part of the Buyout, will be sent directly to the Client.        

 

Termination and Factoring Fees

During a transition from one factor to another, there is usually a short period of time where you will be paying factoring fees to both organizations; this happens when both factors charge their own fees for the factored accounts.

The factor you are leaving will calculate their charges to the day of the buyout, plus any cancellation fees as listed in your contract. Meanwhile, according to the agreement with your new factor, they may charge their own factoring fees for the same accounts that are being bought out. While not all factors charge fees to create a new account (specifically UC Factors), you will be paying twice for factoring charges on any invoice pertaining to the Buyout.

 

Conclusion

Understanding the factoring process and the steps needed to make a switch allows you to time your termination properly.

This is a complex process and the amount of time, attention and money required to do so will vary based on your contract and your unique situation. Understanding the process ensures you can take a strategic approach and create a seamless, easy transition.

 


One of the largest parts of a successful factor switch is to make sure your new factoring company is a good fit for your business. Learn how to choose the right factor for your company here:

Free PDF Download: How Do I Choose a Factoring Company?