Switching Factoring Companies

Signing a Factoring Contract

Last Updated May 3, 2024

A factoring relationship can be exciting in the beginning as your company’s cash flow is improved and you have a process in place to efficiently factor your receivables. However, over time you may find that your existing provider isn’t the right fit for your company, whether it’s because of customer service issues, inability to factor certain debtors, or something else entirely. If this is the case, you may want to switch factoring companies.

In this article, we will overview when it’s the right time to consider this switch, the reasons you may consider switching, and the potential risks associated with switching.

When Is the Right Time to Switch Factoring Companies?

Switching your financing partner to another factoring company may be beneficial in situations including:

  • Better pricing found elsewhere
  • Unsatisfactory level of service with current funding partner
  • Desire to switch to a partner with expertise in your industry

Unfortunately, switching factoring companies is not always an easy process. Sometimes you’ll find that an early termination is necessary, in which case there are several factors you’ll need to be aware, including: length of agreement, auto-renewals, window for notification, early termination fees, and other penalties associated with terminating.

In addition to exit terms, we’ll be taking a closer look at three other important areas of an invoice factoring agreement in separate posts: float, factoring rates and notice of assignment.

Reasons You May Want to Switch Factoring Companies

There is a number of reasons a business may want to switch to a different invoice factoring provider. However, we find that the reasons below are most common across industries.

Length of Agreement With a Factoring Company

A one (1) year term is the most common length of an invoice factoring agreement. However, terms lasting as long as two and three years exist with some factoring companies. A shorter term equates to more flexibility. For optimal flexibility, don’t agree to terms longer than one year.

Auto-Renewal and Window for Notification

The length of agreement (term) also becomes a factor with the auto-renewal clause. Most factoring agreements automatically renew for another subsequent term without termination notice. For example, if your two-year contract expires in June of 2024 and you miss the window for notification, you are automatically locked in for another two years or until at least June of 2026.

Know your auto-renewal date (typically the date the contract was signed). More importantly, know the window for notification. Two to three months is the most common window for notification, but longer lead times do exist. Mark the notification date on your calendar and have a conversation with your factoring company. By not giving notice, you will automatically be locked in for another term and will not have an opportunity to reevaluate your position and negotiate a better deal.

Early Termination Fees by Factoring Companies

Setting up the relationship requires time and resources by the factoring company at the onset, so it typically takes the contract term to recover those costs. Factoring companies ensure they cover these costs by imposing early termination fees.

A simple and common early termination fee is calculated as (monthly minimum fee X the number of months remaining in the term). Look for these variables to be outlined in your invoice factoring agreement. Another calculation could be (monthly minimum volume X a pre-determined percentage). Crunch the numbers before signing your agreement to understand what an early termination would cost.

In Summary: Switching Invoice Factoring Companies

To recap, when you sign an agreement with a factoring company:

  1. Remember a shorter term is best, don’t sign multi-year agreements
  2. Know your notification date and set up a calendar reminder to review the agreement each year
  3. Understand how much it would cost to exit your agreement early in case you find yourself wanting to go with another partner

Need a New Provider? altLINE Can Help

If you are looking for a new factoring company to switch to, give altLINE a call at +1 205-607-0811 or fill out our quote form. As a bank factoring company, we pride ourselves in providing top tier customer service and transparency throughout the entire factoring relationship.