What directors need to know

It’s perfectly possible that after entering into a factoring agreement you may want to exit the agreement completely or, change the terms of the factoring agreement. If you find yourself in this position, then you will be relieved to hear that it is possible to amend the terms within a factoring agreement or walk away, albeit usually subject to additional fees and costs.

If you have agreed to a factoring agreement, then you will have agreed to pay a settlement fee that must be paid should you wish to cancel this agreement before the end of the term set out. The factoring company, or ‘factor’, will outline this clause into the factoring agreement to compensate for any losses incurred by the agreement being terminated early. We explain how these fees work and what to do to minimise the amount you will need to pay should you need to cancel a factoring agreement.

What is a factoring agreement?

A factoring agreement is a type of debtor finance that involves a business ‘selling’ its accounts receivable or invoices to a third-party for an agreed percentage of all accounts payable.

Assuming that you are the company that wants to sell its accounts payable in order to raise cash funds, entering a factoring agreement means that your company will hand over control of collecting payment from those who owe you to the third-party. This allows your business the security of meeting its cash flow needs without having to worry about late payments or defaults on payments.  

In some cases, you may wish to end a factoring agreement term early, for example if you feel the percentage taken is too high, or you simply wish to take back control of your accounts. But what can you do to lessen or avoid these termination fees?

Terminating a factoring agreement early – check your contract thoroughly

Ensuring that you fully understand the terms set out in your agreement can be helpful to avoid early termination fees. The contract will outline all the terms and conditions involved in early termination, providing details of notice periods required and fees – so read the small print very carefully to determine what you should do next.

If needed, you can seek professional advice by contacting us to gain a better understanding of these terms if you’re unsure about any of them.

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 – 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.

However, 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.

If you’re already in the contract and wish to terminate early, then you may need to seek professional assistance from one of our advisors to help you negotiate a deal.

Be transparent

You must be clear to the factor (or lender) on why you wish to terminate the agreement. Whether it is because you wish to regain control of your accounts receivable, you feel the percentage they take is too high, or you simply feel you may be able to find other suitable financing options, it’s important to be truthful about it. This way the factor may be able to provide some form of mutually-agreeable solution to allow you to avoid the termination fees.

Forecast your requirements

Terminating a factoring agreement isn’t ideal for either party, so ensuring you plan ahead could help you to minimise the need to do so. In some instances, termination could become unavoidable, but forecasting your accounts and financial requirements accurately for the period covered within your agreement can lessen the impact of this.

Transfer to a competitor

If it is the case that the issue with the factoring agreement is the percentage is too high, you can consider transferring the book to an alternative factoring company. It is possible for the new factoring provider to buyout the ledger from your existing supplier. They will generally guide you through the process to ensure a smooth transition and to minimise the costs, as it is also in their interest to do so.

Seek external support

Ending a factoring agreement early may not always be the best option financially. You may feel it is necessary, but by seeking professional help from a business such as ours, you might be able to find a more preferable solution.

The financial products available on the market are constantly changing, with one of the new products being market invoice finance. Where factoring take control over the full accounts ledger, market invoice finance only applies to specific invoices and is not subject to a contract.

Therefore you also avoid termination fees through market invoice finance.
If you’re unsure about changing your factoring terms, moving to a new type of lending, or negotiating with your factor, then we can certainly help.

At BusinessRescueExpert, we’re a highly-experienced team specialising in helping businesses affected by excessive factoring agreement termination charges. Get in touch with us today.