How do you terminate a factoring contract?

Check for termination conditions in your contractIf you have entered into a factoring agreement or contract, you now maybe thinking it is not the right solutions for you or may wish to change some of the terms, you may be wondering whether you can amend or exit the contract altogether.

There are ways to change and terminate an invoice finance contract. Some will involve paying additional fees, but planning in advance will help to minimise any extra costs. So what should you do if you’re not happy with the existing arrangement.

How to get out of a factoring contract?

A factoring contract is a legal agreement between a business and a financial institution, in which the business sells its accounts receivable at a discounted rate in exchange for quick cash.

While this arrangement can be helpful for businesses that need immediate funding, it can also be costly in the long run. If you find yourself in a situation where you need to get out of a factoring contract, there are a few options available.

One option is to simply stop selling your receivables to the factor. However, this may not be enough to get you out of the contract, as you may still be liable for the outstanding balance. Another option is to negotiate with the factor to buy back your receivables at face value.

The terms of the agreement will specify the maximum amount that can be borrowed, the fees charged, and the conditions under which the agreement can be terminated. If you are looking to terminate your factoring agreement, there are a few things you need to keep in mind. First, you will likely be required to give advance notice to the lender. Second, you may be responsible for paying any outstanding balances owed under the agreement.

If you are a business owner who has entered into a factoring agreement and you want to terminate the agreement, there are a few things you need to do. First, you should notify the financial institution in writing of your intent to terminate the agreement.

Finally, it is important to carefully review the terms of your agreement to ensure that you are in compliance with all provisions before taking any action.

Check for termination conditions in your contract

Factoring contracts have a minimum term of between three and twelve months, plus a notice period for exit. These will determine what you need to do next, although you may be able to terminate it regardless of the terms if you pay a financial penalty.

Most contracts are detailed in their instructions for termination. There might be a specific procedure for giving notice, as well as a time frame, so make sure you check the small print carefully or ask a reliable finance broker to go through it with you.

Understand why you want to change or exit the agreement

Having a clear understanding why you wish to exit there factoring agreement is key. Should there be issues with the amount of money the lender is releasing, its worth asking is they can increase the amount that they advance. Maybe the charges are too high, or you simply feel that another finance product would be better suited to how you operate.

Invoice finance as a whole is flexible, and offers many variations within each product. If you’ve chosen factoring instead of invoice discounting, you may decide that it’s preferable to handle your own credit control, or keep the arrangement confidential from new customers.

Speak to your client manager

Speaking to your client manager, or the BDM that sold you the facility about the issues you are facing with your factoring agreement could be a positive step.

There could be a number of issues that you are facing that you was unaware of as you maybe new to this type of finance. You client manger could sort to any issues.

If you’re not happy with factoring what are the solutions?

Look at invoice discounting as an alternative

Discounting your unpaid invoices allows you to take control over your own sales ledger, some businesses choose this option in order to maintain good customer relationships.

If confidentiality is the problem meaning you do not wish for your client to know you are financing your invoices then, factoring does not offer a confidential option whereby payments are chased in your company name. By using discounting your customers will be unaware that a factoring agreement is in place.

Outstanding invoices are collected by the lender and monies are then placed into a ‘trust’ account under their control but in your business name.

Costs are too high

If the costs are too high lender may be willing to negotiate on costs in order to retain the business, if they will not move on costs they could alter the terms slightly to reduce ongoing fees.

Obtain quotes from other factoring companies, and compare them carefully to your existing arrangement. Factoring providers are always looking for new business, it’s a competitive market, so this could work in your favour.

The total cost of changing company over the whole term of a contract should be calculated with termination fees etc. This is where a good broker could help with the figures.

Be prepared to negotiate

Once you understand the terms covered in your factoring agreement, you are then in good stead to begin negotiations on terminating the agreement early. When negotiating, a good place to start is to gather quotes from competitors should you wish to terminate early, particularly if your dispute relates to the percentage taken by the third-party being too high. This market is competitive, so if you can demonstrate that several better options from different companies would be available to you, then an amendment to your contract may be possible.

It is important to note that these negotiations are better carried out before you sign the contract. This way you are able to demonstrate why you believe you should have more reasonable settlement fees. In some cases, an early termination fee is unavoidable, so you may want to preempt this before the need for it arises.

Shelf funding maybe the only solution

If you feel that termination of the contract is the only option then planning is key when you’re changing from invoice factoring to discounting. You’ll need to plan ahead for the gap in funding, and try to minimise the adverse effect on your cash position.

The things that need to be consider are:

  • Credit control: You may need to take on extra staff to deal with payment collection if you can’t do it yourself
  • Timing: Agree the best time of the month to make the change?
  • Arranging new finance: Are you just swapping lenders or choose an alternative source? Either way, there will be a funding gap to bridge, and you’ll need to arrange this carefully to avoid a sudden drop in available working capital
  • Giving notice on your factoring contract: only when everything else is in place should you finally give notice to your existing lender.

 

Moving products between the same lender will be easier than changing providers. This is totally depending on your motives for change or exit, it’s worth challenging all proposed and existing costs to get the best result

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