What you need to know about
changing factoring companies.

Looking for a new factoring company?
Unhappy with your current factor?
What do I need to know if I want
to change factoring companies?

Here are the answers to these questions and more:

What is a UCC and how does it apply
to me wanting to change factoring companies?
It is standard industry practice for a factoring company
to file a blanket Uniform Commercial Code (UCC) to
secure the factor’s first position security interest
on the invoices funded.

The UCC is a way for factoring companies, banks and
commercial lenders to keep straight who is
lending on what assets. Because receivables change on
daily basis as new invoices collect and old invoices are paid,
factors must file what is called a “blanket” UCC filing
collateralizing all of your receivables even though you may
only be factoring a portion of your sales.
It’s simply impossible for factors to file a new UCC
for each invoice funded. The UCC is simply a flag for
other lenders who chose to run a search indicating a
Security Agreement exists between your company
and the factoring company.

The details of your particular factoring arrangement,
such as rates and which accounts are factored,
are outlined in the Security Agreement itself which is not public not.
A UCC is similar to a first mortgage on your business.

The Buyout Process
The lender with the oldest dated UCC filing is said to
be in “First Position” on the pledged collateral.
For example, a factor has first rights to collect payments
on your invoices and all the related surrounding instruments.

Factoring companies do not take a second position
because the lender in first position could legally take
the check right out of the hands of the second position factor
at any time and have every legal right to do so.
It’s a similar concept to ensuring you get the pink slip
when purchasing a vehicle. You wouldn’t want to have
someone come along one day, unannounced and
take the vehicle you thought you owned and
have every legal right to do so!

To change factoring companies the old factor
must be paid off by the new factor.
Simultaneously the old factor’s lien is released
and the factor’s lien is filed which is
similar to refinancing your home.

A “buyout” is the practice where the new factoring
company pays off the old factoring company using
proceeds from your first funding.

The Buyout Agreement outlines the transition process
and is a three party agreement signed by the old
factoring company, new factoring company and your company.
In the Buyout Agreement you approve the “buyout figure”
provided by the old factoring company.

How is the Buyout Figure Calculated:

The buyout figure is generally calculated by taking the
Gross Receivables Outstanding subtracting any reserves
and then adding in fees due to the old factoring company.
If not automatically provided, it’s best to ask for a breakdown
as to how your figure was calculated. This way you can be
sure you understand if any early termination fees or other
fees on top of your usual factoring charges have been included.

It’s important to understand the buyout figure because
once you authorize that amount the old factor is paid off
you have released any recourse to old factor. From that
point forward you are only dealing with the new factor.

If you are going from a factoring agreement with an 80%
advance rate to a 90% advance rate it’s possible
there will be enough proceeds to payoff the old factor
without your having to come up with additional invoices.

How much does the buyout cost?

If you are able to submit brand new invoices to the
new factoring company which they can use to payoff
the outstanding invoices at your old factor then there
would be no additional cost to you to make the change.
Then, as the payments come in on the old invoices
outstanding from the old factor, as part of the buyout agreement,
those payments are forwarded to the new factor who would
turn around and forward those to you as non-factored at no cost.

That is an ideal situation however, to come up
with the payoff figure most companies need to
resubmit at least a portion of invoices already
factored with the old factor to the new factor.
If that is the case, the invoices part of the “overlap” will
incur factoring fees from both factors.

Therefore, depending on your fee structure your
factoring fees the first month of the change could be
higher than normal. If you’ll be getting a lower rate
from your new factoring company you can calculate
how many months it will take you to recoup that
expense and run a cost benefit analysis.

Depending on the size of the transaction,
some factoring companies offer reduced
fees on invoices part of a buyout. You also want to
make sure you give the proper notice of intent to
terminate to your old factor (if required) to avoid any
early termination fees to leave their contract early (refer to the Security Agreement Section titled “termination or early termination.”

How long does a buyout take?
When you are changing factoring companies it’s best to plan
on the first funding taking a two to three more days than the
normal factoring application setup process.
The added days will be needed at the time of invoice
verification and just before funding as buyout figures
are calculated and sent to you for your approval.

It’s not uncommon for buyout figures to change
because fees continue to accrue and invoices collect so
it’s sometimes necessary to get updated buyout figure
at the very last minute. By aligning yourself with a
factoring company familiar with the buyout process
they can guide you through timing to minimize any
delays in your funding as a result of the transition.
This is especially critical if you have weekly payroll
to meet and cannot spare a few days delay in funding.

What if my situation is not that easy?
Although it is not common industry practice,
it’s possible the old factoring company and the
new factoring company can work together via
an Intercreditor or Subordination Agreement
until the old factor is paid off.

Depending on the circumstances, factors have
been able to “draw a line in the sand” where the old factor
has rights to invoices up to a certain date and the
new factor has rights to all invoices after that date.

Questions you wish you had asked
before you signed up with your current factor:
How many factoring companies can I use at one time?
By the way, the universal
answer is one (per the Uniform Commercial Code/UCC).

If I decide I want to change factoring companies
how much notice will I need to give?

What is the penalty if I want to leave without giving
the required notice and please provide an
example of how the fees would be calculated.
Caution: be on the look out for 12 month f
actoring contracts where requiring a certain
factoring volume per month.

For example, a 12 month contract where you’ve
agreed to factor $100,000 per month at a rate of 2% means
you promise to pay them $2,000 per month in
factoring fees or $24,000 in total factoring fees over the next year.

If you want to leave after 6 months they will charge
you the fees you would owe them for the remaining 6 months
in the contract which in this example equals $12,000.
That is cost prohibitive for most companies especially
trucking companies working on very low profit margins.
You’re stuck!

Even worse, the trucking industry in specific is
very volatile and it’s hard to know how many trucks
you will have running for you over the course of the next year.
Can you imagine committing to factor $100,000 per month
and then having some unexpected circumstance require
you to let go half of your owner operators yet you still
have to pay the factor $2,000 per month regardless of
how many trucks you are running?

Do you use a bank lock box to post my customer payments?
If so, how many days does it take for one of my customer’s
payments to post to my account from the date the
bank receives my customers check? This process has
been known to artificially inflate the invoice turn
and therefore increase your factoring fees.

How many days do you hold my original invoices
before mailing them out to my customers? The answer
should be same day. Invoices are cash and should not be
left sitting around. Not to mention, this is another
way to artificially inflate the invoice turn and increase the factors fees.

How many different people will I work with at your company?
Some factoring companies have either a lot of turnover
or operate call centers where you start with a new representative
every time you call in. Other factors offer dedicated account
administrators to be your point of contact.

Do I need to pay for postage for you to mail my invoices?
That should be included in the factoring fees.

Do you charge me every time I have a new customer to credit check?

Do you charge me every time I setup a new customer?

Do you “batch” my invoices and make me pay fees on all the invoices submitted in a particular batch until the very last invoice in that batch has collected?

Do you start holding reserves once a customer hits
60 days even though I have 90 day recourse?

Contact our account receivable factoring specialists at:
Toll Free:  888-266-0197
On-Line Factoring Request Form