Helpful
information about
changing accounts receivable factoring
companies.
What do I
need to know if I want
to change accounts receivable factoring
companies?
Here are the answers to these
questions and more:
What is a UCC and how does it apply
to me wanting
to change accounts receivables factoring companies?
It is standard industry practice
for a factoring company to file a blanket Uniform Commercial Code (UCC) to
secure the factor’s first position security interest on the invoices
funded.
The UCC is a way for factoring companies, banks and commercial
lenders to keep straight who is lending on what assets. Because receivables
change on daily basis as new invoices collect and old invoices are paid, factors
must file what is called a “blanket” UCC filing collateralizing all of your
receivables even though you may only be factoring a portion of your
sales.
It’s simply impossible for factors to file a new UCC for each invoice
funded. The UCC is simply a flag for other lenders who chose to run a search
indicating a Security Agreement exists between your company and the factoring
company.
The details of your particular factoring arrangement, such as
rates and which accounts are factored, are outlined in the Security Agreement
itself which is not public not.
A UCC is similar to a first mortgage on your
business.
The Buyout
Process
The
lender with the oldest dated UCC filing is said to be in “First Position” on the
pledged collateral. For example, a factor has first rights to collect payments
on your invoices and all the related surrounding instruments.
Factoring
companies do not take a second position because the lender in first position
could legally take the check right out of the hands of the second position
factor
at any time and have every legal right to do so.
It’s a similar
concept to ensuring you get the pink slip when purchasing a vehicle. You
wouldn’t want to have someone come along one day, unannounced and take the
vehicle you thought you owned and have every legal right to do so!
To
change factoring companies the old factor
must be paid off by the new
factor.
Simultaneously the old factor’s lien is released
and the
factor’s lien is filed which is
similar to refinancing your home.
A
“buyout” is the practice where the new factoring company pays off the old
factoring company using proceeds from your first funding.
The Buyout
Agreement outlines the transition process and is a three party agreement signed
by the old factoring company, new factoring company and your company.
In the
Buyout Agreement you approve the “buyout figure” provided by the old factoring
company.
How is the Buyout Figure
Calculated:
The buyout figure is generally calculated by
taking the Gross Receivables Outstanding subtracting any reserves and then
adding in fees due to the old factoring company. If not automatically provided,
it’s best to ask for a breakdown as to how your figure was calculated. This way
you can be sure you understand if any early termination fees or other fees on
top of your usual factoring charges have been included.
It’s important to
understand the buyout figure because once you authorize that amount the old
factor is paid off you have released any recourse to old factor. From that
point forward you are only dealing with the new factor.
If you are going
from a factoring agreement with an 80% advance rate to a 90% advance rate it’s
possible there will be enough proceeds to payoff the old factor without your
having to come up with additional invoices.
How much does the buyout
cost?
If
you are able to submit brand new invoices to the new factoring company which
they can use to payoff the outstanding invoices at your old factor then there
would be no additional cost to you to make the change. Then, as the payments
come in on the old invoices outstanding from the old factor, as part of the
buyout agreement, those payments are forwarded to the new factor who would turn
around and forward those to you as non-factored at no cost.
That is an
ideal situation however, to come up with the payoff figure most companies need
to resubmit at least a portion of invoices already factored with the old factor
to the new factor. If that is the case, the invoices part of the “overlap” will
incur factoring fees from both factors.
Therefore, depending on your fee
structure your factoring fees the first month of the change could be higher than
normal. If you’ll be getting a lower rate from your new factoring company you
can calculate how many months it will take you to recoup that expense and run a
cost benefit analysis.
Depending on the size of the transaction, some factoring companies offer reduced fees on invoices part of a buyout. You also want to make sure you give the proper notice of intent to terminate to your old factor (if required) to avoid any early termination fees to leave their contract early (refer to the Security Agreement Section titled “termination or early termination.”
How long does a buyout take?
When you are changing factoring companies it’s best to plan on the first funding taking a two to three more days than the normal factoring application setup process. The added days will be needed at the time of invoice verification and just before funding as buyout figures are calculated and sent to you for your approval.
It’s not uncommon for buyout figures to change because fees continue to accrue and
invoices collect so it’s sometimes necessary to get updated buyout figure at the very last minute. By aligning yourself with a factoring company familiar with the buyout process they can guide you through timing to minimize any delays in your funding as a result of the transition. This is especially critical if you have weekly payroll to meet and cannot spare a few days delay in funding.
What if my situation is not that easy?
Although it is not common industry practice, it’s possible the old factoring company and the new factoring company can work together via an Intercreditor or Subordination Agreement until the old factor is paid off.
Depending on the circumstances, factors have been able to “draw a line in the sand” where the old factor has rights to invoices up to a certain date and the new factor has rights to all invoices after that date.
Questions you wish you had asked
before you signed up with your current factor:
How many factoring companies can I use at one time? By the way, the universal answer is one (per the Uniform Commercial Code/UCC).
If I decide I want to change factoring companies how much notice will I need to give?
What is the penalty if I want to leave without giving the required notice and please provide an example of how the fees would be calculated. Caution: be on the look out for 12 month factoring contracts where requiring a certain factoring volume per month.
For example, a 12 month contract where you’ve agreed to factor $100,000 per month at a rate of 2% means you promise to pay them $2,000 per month in factoring fees or
$24,000 in total factoring fees over the next year.
If you want to leave after 6 months they will charge you the fees you would owe them for the remaining 6 months in the contract which in this example equals $12,000. That is cost prohibitive for most companies especially trucking companies working on very low profit margins. You’re stuck!
Even worse, the trucking industry in specific is very volatile and it’s hard to know how many trucks you will have running for you over the course
of the next year. Can you imagine committing to factor $100,000 per month and then having some unexpected circumstance require you to let go half of your owner operators yet you still have to pay the factor $2,000 per month regardless of how many trucks you are running?
Do you use a bank lock box to post my customer payments? If so, how many days does it take for one of my customer’s payments to post to my account from the date the bank receives my customers check? This process has been known to artificially inflate the invoice turn and therefore increase your factoring fees.
How many days do you hold my original invoices before mailing them out to my customers? The answer should be same day. Invoices are cash and should not be left sitting around. Not to mention, this is another way to artificially inflate the invoice turn and increase the factors fees.
How many different people will I work with at your company? Some factoring companies have either a lot of turnover or operate call centers where you start with a new representative every time you call in. Other factors offer dedicated account administrators to be your point of contact.
Do I need to pay for postage for you to mail my invoices? That should be included in the factoring fees.
Do you charge me every time I have a new customer to credit check?
Do you charge me every time I setup a new customer?
Do you “batch” my invoices and make me pay fees on all the invoices submitted in a particular batch until the very last invoice in that batch has collected?
Do you start holding reserves once a customer hits 60 days even though I have 90 day recourse?