How to Get Out of Factoring In 10 Steps
Factoring provides clients with funding against unpaid outstanding sales invoices and a credit control service to help them collect in their outstanding sales ledger. As brokers we are huge advocates of factoring and we have many that are happily using these services that we have helped them find.
However, we ocassionally hear from businesses that are not happy with their existing arrangement and want to know how to get out of factoring completely.
Although cases like this are rare, in order to service all prospective clients, we put together this guidance article that explains 10 steps that a business can follow in order to terminate their facility and get out of factoring.
How To Get Out Of Factoring
The 10 steps are as follows:
1) Check your factoring contract
The first step is to check your existing factoring contract and find out:
- Is there is a minimum period? - this is the minimum duration of the factoring arrangement before it can be terminated. You may be able to terminate it earlier but there may be financial penalties to do so.
- How much notice do you need to give? - normally there will be a period of notice required to terminate a factoring facility. There may also be other restrictions on when notice can be given - again you need to understand how much notice you need to give, how and when.
2) Get some advice
At this point it would be helpful to seek some advice on your situation from either: an experienced invoice finance broker; your accountant or your solicitor (you may be charged for advice from an accountant or solicitor).
3) Identify your problems with factoring
Work out exactly why you are not happy with factoring as it will determine what you do next. Some possibilities and solutions are shown in the list below:
ISSUES WITH FACTORING & POSSIBLE SOLUTIONS
Wanting to reduce costs:
- Ask your existing factor for a reduction in price
- Search for competitive quotations from other factoring companies
- Consider moving to invoice discounting (you collect your own invoices) to reduce costs
Desire to collect own sales ledger:
- Consider moving to invoice discounting where you can collect your own sales ledger, also reducing the cost of your invoice finance
Not wanting customers to know you use the service:
- Consider moving to a confidential facility either Confidential Factoring where the factor chases in the name of your company or Confidential Invoice Discounting where you do the chasing yourself
Insufficient funding being provided:
- Talk to your existing provider for help.
- Or talk to alternative factor who may be able to release additional funding, not all providers fund the same percentage.
- There are numerous additional bolt on services that can free up more money, for example a cash flow loan or an overpayment. If you need the additional funding longer term, then compare funding levels between different providers as they will not all be the same.
If you have a service issue with your particular provider, you should firstly seek to take it up with them, by making a complaint. If you are unable to resolve the problem with your provider, check if they are member of the ABFA, the Asset Based Finance Association which has recently become part of UK Finance. There is still an ABFA complaints escalation process that you can follow (which is currently in the process of migration to UK Finance), which ultimately leads to arbitration via an Ombudsman service. Please see our latest guidance about making complaints about invoice finance companies.
4) Consider product migration
As outlined above a move to an alternative form of invoice finance could solve your issues with these services. For example if you want to reduce the costs, have a confidential facility customers don't know about or handle the credit control yourself, you might consider moving to confidential invoice discounting. This could enable you to retain the benefit of the funding generated by invoice whilst overcoming your problems with factoring.
You can ask your existing provider for an alternative product or seek an alternative provider.
Even if your ultimate goal is to leave invoice finance completely, you might consider the interim step of moving from factoring to invoice discounting. This is likely to reduce your costs and give you the opportunity to retain the funding afforded by invoice finance whilst you take over the credit control function for your business from your factoring company.
Alternatively, you might consider a selective facility. Rather than submitting all your invoices for funding (whole turnover), you can pick and choose invoices to fund, often without any contractual lock in at all. You can then dip in and out as your cash flow dictates. This can often be a good "safety blanket" option if a business is seeking to leave whole turnover factoring or discounting.
5) Plan any product migration
If any of the product changes mentioned above would help solve your problems, or take your business towards its goal of leaving invoice finance it is important that you plan the movement between the products.
You might want to consider moving to a business loan as an alternative.
Consider the most appropriate time of the month to make any changes so that you minimise any impact on your cash flow through payments being delayed and credit control being in transit. Also if you are moving from factoring to a confidential facility, you will need to ask your customers to make payments into a specified "trust account". This is a bank account that is in the name of your business but is controlled by the invoice finance company. The timing for making such a change is important as it can cause your cash flow to be temporarily disrupted.
6) Take over the credit control function
If you are moving from factoring to invoice discounting or leaving invoice finance completely, you will need to take over the credit control function. Depending on the size of your organisation this may be something that you can handle yourself or you may need to recruit credit control staff. Alternatively there are outsourced services available. Consider the cost of these changes as this is one of the principle benefits of factoring - normally you no longer need to employ credit control staff.
The timing of this change needs to be worked into your overall migration plan.
7) Calculate the residual funding gap
If you want to leave invoice finance completely you will need to decide how you are going to replace the funding that you are currently receiving. This is often the most difficult step for businesses that are already used to using invoice finance as it can release a lot of cash into your business.
It may be that you are able to inject your own money to replace the funding from factoring or you may be intending to apply for an overdraft or loan to cover part, or all of the funding gap.
However you intend to address the funding gap you need to determine exactly how much additional cash you need to find or raise in order to preserve the cash flow of your business and replace the funding you have been receiving from your factoring facility.
8) Plan your funding migration
Once again you need to plan the steps you will take to move from the funding provided by factoring to your alternative source. If your new funding source is less than the amount of funding generated from your current facility you will need to plan the reduction in order to make the switch.
For example, if you have £80,000 being provided by factoring and you are intending to move to an overdraft of say £30,000, you will need to reduce your usage of the factoring funding by £50,000. Is this realistic for your business? If it is, you need to decide and plan the period over which you can afford to make this reduction in the funding that you are drawing down from your factoring facility. For example a £50,000 reduction in funding over the course of a year would mean a reduction of £962 per week. You would need to leave that amount in undrawn availability on your factoring facility each week in order to build up the £50K required to move to the overdraft.
Also, you need to apply for any residual funding, such as the overdraft in the example above, early enough to ensure that it is available when you need it. You also need to confirm the costs that are likely to be associated with alternative sources of funding.
9) Make your funding migration
Once you have planned your residual funding arrangements, and planned how you will migrate from your current arrangements to the new arrangements you will need to put that plan into action.
If you are gradually reducing the amount of funding that you draw from your availability you will not normally be paying any discount charge on the undrawn funds. However, you will still be paying service charge or administration charge during this interim stage.
You could ask for a reduction in your service charge in return for placing a cap on the maximum level of funding that you are allowed to draw from your funding arrangement. This might help reduce your costs further during the migration.
10) Terminate your invoice finance facility if necessary
You will need to plan the point at which you intend to give notice of termination of your facility to your existing factor, based on the terms of your agreement and how that would work in conjunction with the migration to your new funding arrangements.
So by following these 10 steps you can get out of using your current facility and move your business funding arrangements to any one of the alternatives detailed above instead of factoring.