Switching factoring companies is not for the faint of heart and, thus, should not be taken lightly. Any changes you make will impact your business and your customers. Consequently, switching factoring providers should be thoughtfully considered and not rushed. This article is not intended to replace the detailed conversations you should have with your factoring providers before you make the move. Rather, it can help you by pointing out some things you should know.
Switching providers can take time – sometimes weeks
The first thing to keep in mind is that switching small business factoring providers can take a while. Sometimes this process can go quickly and be completed in less than a week. More often, however, it can take a couple of weeks. During this time, both providers will be discussing how to do the “take out” (the switch) and how to settle accounts. Ask your provider for an explanation of what will happen so that you can be prepared. This matter is important because you may be without financing for some time.
You may be without financing for a period of time
During the transition, you will reach a point when your current provider won’t be able to finance more new invoices, and your new provider won’t be ready either. You need to prepare for this point because it happens often – and usually during the week when you need to make payroll! As a precaution, you should build a small cash reserve to cover expenses during the transition.
Is there enough money for the take out?
During the transition, the new factoring company will often buyout the invoices purchased by the old provider. This means the new provider must pay the old provider whatever they advanced plus the fees accrued to this point. However, the advance rate of the new provider might not be enough to cover this total. Let’s say that you have a $1,000 invoice with the old provider and that your advance rate was 85% – or $850. Additionally, you have accrued $10 worth of fees. Now, let’s say that the new provider also advances 85%. That means that their advance would only cover the $850 advance.
So, who will pay the remaining $10 fee that the old provider needs? Many transactions have failed while trying to answer that question. Often, the new provider issues an over-advance to handle it. At other times, you will have to provide the funds by financing some fresh invoices during the take out process.
Your clients need to be informed of this change
Just as important, your clients need to know that you will have a new factoring company. They need to be notified of the new payment address and will likely need to execute a new notice of assignment. This process can impact your clients, and some may react negatively. Keep this possibility in mind and discuss it with your new provider.
By the way, we are not trying to dissuade you from changing providers. We just want to make sure you know what is involved.
Get a factoring quote
We can provide factoring lines with high advances at low rates. For more information, get an online factoring quote or call (877) 300 3258.
Disclaimer: This article is provided as information and not as legal or financial advice. Please seek an expert if you need advice.