How to Properly Switch Factoring Companies

A factoring company can allow your organization to fill the gaps between service and payment and ensure you have a reliable, steady stream of cash flow for your business. In some cases, though, you may need to make the switch from one factoring company to another. The most common reasons for making a switch include cost and overall quality; learning more about why you might want to make a change and the steps needed to switch from one factor to another can help you make the most of the process.

Why Switch Factoring Companies?

There are several reasons businesses make the decision to switch from one factoring company to another, including:

Cost

Rates and fees vary between factoring companies; in some cases, a company will make a switch based primarily on cost, particularly if all other features remain the same.

Service

Client satisfaction can trigger a switch from one factor to another; if the client does not feel their needs are being addressed by the factoring company, they may seek a more responsive provider.

Risk Reduction

Some factoring companies operate only on full-recourse terms. A business which has suffered loss of income because their customer became insolvent and didn’t pay their invoice, may want to switch to a non-recourse factoring company that takes the credit risk on the end customers.

High Customer Concentration

Many factoring companies don’t like working with accounts that have high customer concentration. If this is the case, a business may look for a factor that is more accommodating.

Customer Credit Extensions

Factoring companies approve credit for their client’s customers; if the current factoring company can’t cover one or more of the client’s end customers, they may seek help elsewhere.

They Value Service Over Cost 

A client that wants more full-service support, with plenty of interaction and service may not be happy with a straightforward, no-frills provider. In some cases, the client will move on to a more service-oriented factor, even if the cost is higher.

A Checklist to Switch Factoring Companies

If you are planning to make the switch from one factor to another, then the following checklist will help ensure you have everything covered and that the process goes as smoothly as possible:

1. Review your existing contract: You have a contract with your current factor; this document will outline what your obligations are and any penalties that will apply if you cancel early. In some cases, it is worth waiting out a few months to avoid fees; in others, it is worth paying a termination fee to move on.
2. Research and select a new factoring company: Determine what features are most important to you and what you’re missing in your current factoring company. Review your options and select a factoring company that better matches your needs. You should decide on your new factoring company before you terminate your existing one and be aware of costs, service fees, turnaround times and more.
3. Notify your existing factoring company of the pending change: You need to let your old factoring company know that you are moving on. This will allow them to begin preparing your account for the switch and allow them to start calculating any buyout costs or fees that will be needed.
4. Sign with your new factoring company: Once you have chosen a new factoring company you’ll need to apply and qualify with them; while you will sign a new contract during this time, it will not actually be effective until your old contract is completely satisfied and all requirements are met.
5. Grant permission to share details: Your new factoring company needs permission to view your existing accounts that are with the original factor. You’ll need to write a letter of permission allowing your original factor to share these confidential details with your new factor.
6. Let your customers know a change is coming: You’ll need to provide your customers with the start date and any new payment details they will need.
7. Allow time for the two factoring companies to work together and create a buyout agreement: This figure represents the amount needed to fully close out your account and transfer it. Review the buyout details when they are available.
8. Wait for the switch to occur: Your original factor will stop accepting and processing invoices and the new one will begin. Your old factor will redirect any payments received after this date to your new factor for processing.

The process to switch from one factoring company to another can be somewhat time-consuming, because of the details and steps involved. Making sure you choose the right factoring company in the first place or thoroughly researching the factoring company you are thinking of switching to can cut down on the number of times you’ll need to go through this process. It will also ensure you get the best possible service and remain happy with the provider you have chosen.