A factoring contract is a type of financial agreement in which one company sells its accounts receivable to another company at a discount. In essence, the selling company is using its receivables as collateral to borrow money from the factor. This arrangement can be beneficial for both companies involved.
For the selling company, it provides a way to quickly generate cash that can be used for expenses such as payroll or inventory. For the buyer, it gives them the opportunity to earn a return on their investment by collecting payments from the selling company’s customers. Although factoring contracts can be complex, they can be a helpful tool for businesses that need access to quick capital.
You should review the termination or amendment conditions in your contract if you wish to change your existing invoice factoring arrangement. Without incurring a financial penalty, you may be able to terminate the agreement within the notice period.
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 agrees to sell its invoices at a discount in exchange for an immediate infusion of cash. While factoring can be a helpful way to improve cash flow, it can also be expensive and difficult to get out of. If you’re stuck in a factoring contract and need to get out, there are a few options available. One option is to negotiate with your factor to see if they’ll agree to cancel the contract.
Another option is to find another company that’s willing to buy your invoices at a higher rate, which can help offset the cost of the early termination fee. Finally, if all else fails, you may be able to cancel the contract by paying the early termination fee, which is typically equal to the remaining balance of the invoices being financed.
While getting out of a factoring contract can be costly and time-consuming, it may be necessary in order to free up cash flow and protect your business.
Renegotiate an existing invoice factoring arrangement?
You may be wondering whether you can amend or end a factoring contract if you’ve entered into one but regret it now or want to change some of the terms.
An invoice finance contract can be changed or terminated in several ways. Depending on the service, you may need to pay additional fees, but planning ahead will minimise the amount of extra money you have to spend. If you are unhappy with the current arrangement, what should you do?
Check for amendment or termination conditions in your contract
There is a minimum term and a notice period for exiting a factoring contract. If you pay a financial penalty, you may be able to terminate it regardless of the terms.
Termination instructions are usually detailed in contracts. Be sure you read the fine print carefully or ask a reliable finance broker to walk you through the notice process. There might be a specific procedure for giving notice, as well as a time frame.
Be clear about why you want to change or exit the agreement
Are you unhappy with the amount of money released? There may be too many charges, or perhaps another product would be a better fit for your needs.
A variety of products are available within invoice finance as a whole, and each product offers a variety of variations. The arrangement may be kept confidential from new customers if you choose factoring over invoice discounting.
Invoice discounting as an alternative
To maintain good customer relationships, some businesses discount their invoices in order to control their own sales ledgers.
If confidentiality is your concern, invoice factoring does offer a confidential option where payment is chased in your company’s name. A factoring agreement will go unnoticed by your customers.
Lenders collect funds and place them in a ‘trust’ account in your business name under their control. This type of arrangement will cost you more, but it’s easier than moving to invoice discounting, but is dependent on industry.
Are the costs too high?
You might be able to negotiate about costs with your lender so that you retain the business or lower the ongoing fees by altering the terms slightly. Compare your existing factoring arrangement with quotes from other factoring companies.
Factoring is a competitive market with so many providers looking for new business, so this could work to your advantage. The total cost of changing companies over the course of a contract must also be calculated, which is where a broker can be helpful.
If product migration is the only solution
Discounting invoices requires planning when you switch from invoice factoring to invoice discounting. To minimise the adverse effect on your cash position, you’ll need to plan ahead for the funding gap.
So, what will you need to consider?
- Credit control: hiring more staff to collect payments if you cannot do it yourself
- Timing: When is the best time to make the change?
- Arranging new finance: Are you staying with invoice finance or switching to another source? To avoid a sudden drop in working capital, you’ll need to plan carefully to bridge the funding gap
- Giving notice on your factoring contract: you should only give notice to your existing lender once everything else is in place
Need to speak to someone?
It’s not uncommon for companies to suffer from unmanageable debts, tightened cash flows, or uncertain futures. Every day, we help and advise company directors just like you.
It is easier to move between products with the same lender than to change providers. Depending on your reasons for change or exit, you might want to challenge all existing and proposed costs.
We can assist you in terminating or changing a factoring finance contract if you’re unsure. Our advisors provide unbiased, independent guidance based on their extensive industry knowledge and relationships with lenders throughout the UK.
Lee Jones is a seasoned expert in the field of business finance with over two decades of experience. With a keen understanding of financial markets and a passion for helping businesses thrive, Lee has become a trusted advisor to countless companies across the United Kingdom.