Over the course of business, it is inevitable that some companies will want to change their factoring provider. The desire for change might come from the factoring company because its client has altered its business model and administrative systems. It might be because the client is close to breaching or has breached the terms of its contract with the factoring company. From the other side of the coin, a company might want to seek better rates for factoring by opting for a new provider; there could be a breakdown in relations between the factoring company and its client; and there could be a shake-up at board level leading to a fresh approach in terms of financing. The reasons are multiple and complex as to why a factoring company might part ways with a client. This post will examine the procedure used to transfer a factoring facility to a different factoring company.
The Asset Based Finance Association (ABFA) set up industry guidelines for switching factoring facilities. This was rolled over by UK Finance when they took over the duties of the ABFA.
The ABFA devised a system where the outgoing factor could hand over to the incoming factor. The basis of this system is that the outgoing factor makes deductions to prepayments on unpaid invoices to cover the debts it is owed for running the factoring facility.
UK Finance has codified this system in its paper ‘Guidelines for Inter-Member Transfers’. The guidelines set out the forms and documentation needed to transfer unpaid invoices from the outgoing factor to the incoming factor. This is done by the outgoing factor reassigning outstanding debts back to its client so that the client can assign them as unpaid invoices applicable for prepayment from the incoming factor. This system allows for the incoming factor to buy the invoices from its new client and apply its fees and warranties, and for the outgoing factor to avoid having to give legal assurances to the incoming factor over unpaid invoices it still owns.
It is a complex process because there is no obvious point when an inter-member transfer can be smoothy achieved – business is ongoing and there will always be new invoices raised and invoices with various times still to run before maturity.
Details of Transfer
Once the terms of the inter-member transfer have been agreed upon between a company and its outgoing factor, the following steps are usually followed:
- The incoming factor will ask for a reference from the outgoing factor about the company concerned. This is not obligatory but considered good practice and courteous as the incoming factor will want to know how well it can expect its new client to conform to the rules of a factoring facility.
- The two factoring companies will agree an official transfer day. This will be the day that the client company will repurchase from the outgoing factor all outstanding invoices so that the balance is paid up on the outgoing factoring facility. The client will then sell the invoices to the incoming factor under its terms and conditions and the prepayments will go to paying off the debts the client has incurred in buying back its unpaid invoices. This might sound circuitous but it is the safest legal way to proceed.
- The company seeking to change factoring companies will sign agreements about charges, guarantees, indemnities and waivers with the incoming factoring firm prior to the transfer day. These will be held in an escrow account until the day of transfer.
- Also prior to the transfer day, the client will send a letter to its outgoing factor instructing it to forward all future payments for invoices to the incoming factor. A copy of this letter will be sent to the incoming factor.
- Again prior to transfer day, the client will send letters to all its customers informing them to make payments to the new factoring company. Similarly, the outgoing factor will write to all the client’s customers informing them of a change in factoring facilities.
- The incoming factor will provide indemnities to the outgoing factor to protect against loss from overpayments, credit notes and cross trading. The time lag caused by the clearing of cheques is also dealt with in this documentation.
- Documentation is prepared to authorise the incoming factor to cover the client for its indebtedness to the outgoing factor. The amounts involved are not filled in until the day of transfer as the exact sums of money involved are not known until that point.
Factoring Goes On
Once all this paperwork has been assembled and dispatched at the appropriate times, funders have been notified, legal documents have been signed etc. the inter-member transfer is completed and the client wakes up to a new day with a new factoring facility.
The outgoing factor will continue for a while to have communications with the incoming factor. For three calendar months the outgoing factor will report to the incoming factor the details of any monies received for the payment of invoices to the client.
And finally, a company is free of its old factoring facility and able to operate under the terms and conditions of its new factoring facility.
The inter-member transfer while being well-regulated by the guidelines of UK Finance is not a simple, fast or cheap process. There are costs involved in the numerous letters that need to be written and sent, the legal documents that need to be drawn up and the accounting procedures that need to be undertaken.
Moreover, it is a process that takes time to complete. Although a transfer day is set, much work has to be done prior to the transfer day, and obligations remain on the outgoing factor for three months after the transfer day.
This means it is inadvisable for a company to look to make a hasty decision to change factors on the basis of making a quick buck by getting lower fees and charges. Factoring facilities embed themselves in a company’s administration and finances and should be viewed with far more significance than merely an alternative to a bank loan.