A Checklist for Changing Invoice Factoring Companies

by | Small Business Financing, Small Business Funding

You like the invoice factoring process and recognize what it does for your company.

You appreciate the predictability of cash flow and the access to funds without taking on additional debt, and you just generally enjoy being out of the receivables and collections game.

But maybe, after coming to understand the process better, you have started to wonder if there might be a better factoring company to suit your company’s particular needs. Perhaps you think the fees you’re paying are higher than you anticipated, or the level of service isn’t quite what you were expecting. Or maybe you even suspect that your factoring company is holding customer payments a little longer than needed – even one day past a due date would be too much – to bump up their interest charges, which directly costs you money.

Whatever your reasons, changing factoring companies can be made easier with a little bit of planning and preparation. Sitting down with your finance manager or accountant and running through this checklist can get you on the right track.

__ Review your current invoice factoring contract

Make sure you understand your obligations, and what it might mean to your company when you make the switch. Again, get your accountant, and your lawyer if necessary, to help you determine the best course of action.

What you don’t know – or maybe just forgot – can hurt you. When does your contract expire? If you are considering leaving your current company before the contract is up – and one year is the typical term – you still could have some obligations relative to that company in the form of termination fees, or payments tied to still-outstanding receivables.

There will likely be a buy-out number, which the new company will pay to your current factor, if there are funds still “on the table,” which haven’t been received from your customers. The buy-out fee will be paid from future receivables from your customers.

__ Identify potential factoring companies

Before you leave, make sure you have a good place to land. What’s important to you in any business relationship is important here. Make some calls and ask the right questions.

  • Does the company have experience in your industry?
  • How long has the company been in business?
  • Does the factoring company offer other business funding services?
  • Does location matter to you?
  • Are the company’s terms and fees reasonable?
  • Who will be your primary contact and do you have reasonable chemistry with that person?

__ Be upfront about everything

You will expect representatives from your new factoring company to be honest with you, so you owe them the same courtesy. Besides, talking about potentially difficult areas before the arrangement becomes official gives you both a chance to address them with a fresh perspective and put together an action plan for making the situation better. On the positive side, telling your contacts about your short and long-term plans for the business might help them figure out how best to help you. Be prepared to answer the following questions:

  • What were your specific reasons for leaving your former factoring company?
  • Are there “problem accounts” or slow-payers you’re bringing into the relationship?
  • Are there outstanding legal issues involving your company, your former factoring company, or any of your customers?
  • What are your plans for growth and expansion? How does your company’s financial position help or hurt your business goals?

If you haven’t been completely honest about something important to the factoring arrangement, there’s a good chance the new company might have second thoughts, and ask you to look elsewhere. And be sure to try to work out disputes with your current factoring company before you leave.

__ Look at your aging receivables

Your new factoring company needs to know about what’s lingering that may be a problem when moving your receivables over. It’s important to note to which receivables your current factored has a claim.

__ Prepare for due diligence

This is the new factoring company’s responsibility, but you can make it go faster by having the right information on hand.

Financial statements for your company (and its principals, if appropriate), bank statements, and records of payment histories from current customers may be requested. Credit reports might also be run for your company and some of your customers.

__ Make sure you completely understand the new arrangement

Map out your concerns and decide what you need from a factoring relationship. Not all factoring companies offer the same deals. Clarify what kind of advance rates you can expect and ask what could potentially change the rate – higher or lower – in the future.

__ DO NOT file Uniform Commercial Code (UCC) paperwork until all outstanding issues – with both the old and new factoring companies – are settled

By law, your company can only work with one factoring company at a time, and the Uniform Commercial Code filings designate which factoring company has claim to your receivables. If you file prematurely and, for whatever reason – customer disputes, legal problems, or the new factor declines your business – your anticipated arrangement falls through, you could be left in limbo without a funding source.

__ Make sure everything is in place before you switch

And make sure the new factor does not contact your current factor until all necessary contracts, agreements and paperwork are signed. Plan for at least 30 days to ensure that everything is handled properly.

 __ Call MP Star Financial

Since 1995, the small business funding experts at MP Star Financial have successfully arranged thousands of invoice factoring transactions, and have helped dozens of clients switch factoring companies. MP Star Financial offers reasonable fees that are clearly explained to you in advance, and provides the best customer service in the industry.

In addition to invoice factoring, MP Star Financial can provide your company inventory financing, equipment leasing, merchant card financing, and other small business funding options.

If you’re considering changing factoring companies, contact MP Star Financial to talk about your options and how to get the process started. Call for more information. (800) 833-3765, extension 150.


Let's Talk

For more specifics about invoice factoring, visit MP Star Financial online or schedule time to talk with a representative. Don’t wait 30 to 45 days for payment. MP Star can get funds to your account faster. Call MP Star Financial today at (877) 292-1904, extension 150.