3 Questions to Ask before Switching Factoring CompaniesPosted by Factor Funding Co. on June 9, 2015
As careful as you may have been when first choosing a factor, you may find later that you want or need to choose another for your business. Before you switch factors, however, you need to consider a few facts to determine if this decision would be wise.
Changing factors, as with any financial decision for your company, should be something that you approach with caution. You should answer these three important questions before you decide whether or not to work with another factoring company.
Do You Have Valid Reasons for Switching?
Given the complicated nature of switching factors, you must determine if you have valid reasons for wanting to change from one factoring company to another. Some of the more common reasons that people have used in the past to justify their switch include:
- Receiving poor customer service: If your factor does not communicate well with you or provides rude, incomplete, or incompetent service to you, you may have a valid reason for wanting to change factors.
- Needs are not being met: A factor that does not take care of you as a customer or meets your financial needs may justify you wanting to work with another factoring company.
- Poor treatment of clients: If your invoice clients are being treated poorly, you have a valid reason for needing to choose another factor. Poor treatment of your invoice clients puts your company at risk because they may decide not to do business with you in the future based on how your factor treated them.
- Lower rates with another factor: You must focus on your bottom line like any other business owner. If you can get cheaper discount rates elsewhere, you may do well to switch factors.
Once you identify the reasons you want to switch factors, you can then determine objectively if the decision would be in your company's best interest. This step can also help you decide if you would be better off staying with your current factor.
What Will the Change Cost You?
Moving your invoices from one factor to another can come at a significant price. Your new factor must buy out your old one, a transaction that may require that you finance it by selling invoices to the new factoring company first. Further, the buyout amount will be determined by:
- The value of your outstanding accounts receivables with the old factor
- Fees that you still owe to the original factoring company
- The amount the factor has in reserve
- Costs associated with terminating your contract with the existing factor
All of these amounts can add up to be a price that you may or may not be able to afford. You should know this price and determine if you can pay it before you switch factors.
Will the New Factor Provide Better Service?
Many factoring companies utilize the same operational strategies when dealing with clients. They use the same application approval techniques and the same criteria for determining how much money they can give you for your invoices.
Before you change factors, you must learn if the new factor will offer you any better service than the old factoring company. You also must determine if the new factor can legally take over the outstanding invoices or if the old factor has retained the UCC rights to them. This information is vital because the existing factor can come back and demand payment from you or the new factor if you have sold those invoices while the original UCC rights were in place.
Switching factors is a decision that you should not take lightly for your business. You can understand the process and know if this change is right for your company by asking yourself these three important questions.