How to Switch Factoring Companies

How to Switch Factoring Companies

Stuck in your factoring contract? Switching factoring companies can be a complicated process. We’ve boiled it down to help you make the right choice for your business. This guide will walk you through key considerations to help you identify the following:
  • Should you make the switch from your current factoring company.
  • The steps to switch factoring companies.
  • Key terms to help you navigate the process.
Before choosing a new factoring company, identify your reasons for switching in the first place. There are many reasons someone might decide to look for a new factor. Some of the most common:
  • Is there a lack of communication or difficulty getting your factoring representative on the phone?
  • Do you have consistent issues with paperwork and billing when speaking to your customers?
  • Are collections issues causing unnecessary and or unexpected chargebacks?
  • Do you experience overly strict credit facility restrictions limiting your ability to grow or work with new customers?
  • Is there a lack of additional service offerings or an inefficient billing process?
If you answered yes to these questions, make sure you keep them front of mind when receiving proposals. With so many options available, it’s easy to lose sight of why you are switching in the first place. You deserve to work with a factoring company that is your business partner and strives to help grow your business every step of the way. Once you decide to move factors, understanding the process will set you up for success. Here are the common steps for switching factoring companies.
  1. Find a new factor
    1. Research new factoring companies and request proposals. DAT has a “Top 10 Freight Factoring Companies Chosen by Carriers” guide that can kick-start your research.
    2. Before notifying your current factor, complete the application process with the new factor. This will help with timing and planning.

      Helpful Tip: When applying for another factor it will not notify your current company.

  2. Create a game plan
    1. Review your factoring agreement (OTR Capital will help audit any agreement to outline the exact termination requirements) and determine eligibility for termination.
    2. Develop a timeline and plan for switching.

      Helpful Tip: If you are planning to terminate your contract immediately, find out if there is an early termination fee involved. Companies such as OTR Capital can help carriers navigate the buyout process. Their experienced representatives will walk you through every step to ensure a seamless transition, whether it’s fees or required paperwork.

  3. Submit termination notice & confirm buyout eligibility date
    1. If you plan on waiting to the end of the term, identify when and how to submit your official notice, and confirm your eligibility date.
    2. Review the factoring agreement to ensure you are submitting the termination notice correctly.

      Helpful Tip: Some factors require it to be hand signed and mailed to their office.

  4. Begin Buyout Process
    1. Your new factor will contact your current factoring company to request the buyout agreement and open aging report.
    2. Once your current factor responds with the Buyout Agreement and Open Aging report, the buyout has started and invoices need to be held until the buyout is complete.
  5. Begin Invoice Audit & Budget for 3-5 Days of Holding Invoices
    1. Your new factor will audit the open aging report provided by your current factor and identify invoices that have issues holding up payment, need to be re-invoiced, etc.
  6. Sign Buyout Agreement & Upload New Invoices
    1. Once the invoices are confirmed, you and your new factor will need to sign the buyout agreement.
  7. New Factor Purchases Account from Old Factor via Wire Transfer
    1. Once all three parties have signed the buyout agreement, the new factor will send a wire to finalize the purchase.
  8. New Factor Obtains the LOR and Begin Factoring!
    1. Once receipt of the wire transfer is confirmed, the old factor will provide a Letter of Release, marking the completion of the buyout process.

Glossary of Key Terms for Switching Factoring Companies

Buyout: A “Buyout” refers to the process of terminating a factoring agreement and transitioning to a new factor where the new factoring company purchases all outstanding invoices from the existing factoring company to close out your account. Once the buyout is complete, the new factoring company will take over collecting on the open invoices purchased from the old factoring company and continue factoring new ones.

Termination Notice: All factoring companies require some form of “Termination Notice” and have differing requirements for what this entails. Some will accept an email, and others require an official letter to be mailed. It is always important to confirm the buyout eligibility date and acceptance of the termination notice in writing ahead of the actual buyout date.

Open Aging Report: An open aging report shows the breakdown of factored invoices that have been billed by the factoring company and are pending payment from the broker. Open Aging Reports are generally broken down in 0-30, 31-60, 61-90, and 90+ segments and show the new factor the overall health of your account. Open invoices should weigh heavily in the 0-45 day segments as most brokers pay on net 30. Invoices over 45 days normally have a paperwork or billing issue that needs to be resolved before payment is made.

Buyout Agreement: The buyout agreement is a document signed by the old factor, new factor, and carrier outlining the amount open on the account and terms for the buyout process.

Letter of Release (LOR): Also referred to as “LOR”, represents the final document needed to complete the buyout process and allows your new factor to update assignment notices from your previous factor to direct payment to the new one.

Switch to DAT’s Factoring Partner: OTR Capital

When it comes to freight factoring, it can be overwhelming to switch factoring companies. We want to empower you so that you don’t feel locked in a factoring contract that is not positively serving your business. At DAT, we believe you should have all the facts on factoring to benefit your business and drive growth. DAT has partnered with OTR Capital as we believe in their service promise to be straightforward, quick, easy and reliable to provide the best factoring experience in the business. DAT and OTR Capital focus on long lasting relationships built on trust.
Switch to OTR Capital Today!
Partnering with OTR Capital will give you transparent pricing, same-day invoice processing, and peace of mind. Switch to OTR Capital today to allow your business to thrive!

OTR Capital

DAT's factoring partner