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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
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      • Holland
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      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
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      • The Roles of Deal Arrangers and Book Runners in Securitization
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      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
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      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
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      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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      • Credit Suisse Bailout
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Home Invoice Factoring Factoring

Changing Factoring Company

John Goodden by John Goodden
January 4, 2023
in Factoring, Legal
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Changing Factoring Company
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Download file | Play in new window | Duration: 6:42 | Recorded on December 12, 2022

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.

Using Prepayments

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.

Brief Observations

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.

Tags: Asset Based Finance Associationhow to change factorinter-member transferUK Finance
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
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      • USA
      • Canada
    • Australasia
      • Australia
      • New Zealand
  • Hi-Tech
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    • UK Fintech
    • Articles
      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
  • Rates
  • Economy
    • Economic Indicators
    • Articles
      • The Collapse of the Russian Rouble: An Historical Analysis and Current Implications
      • The Current State of the UK Economy
      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance Legal Aspects
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
  • Associations
  • ESG
    • ESG Articles
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    • Ripple (XRP) Wins Latest Battle with SEC
    • UK Passes Financial Services and Markets Act 2023
    • Latest about the UK Regulatory Proposal for Crypto Assets
    • How will MiCA (Markets in Crypto Assets) Regulation Affect Trade Finance and the Banking System?
    • Markets in Crypto Act (MiCA) Becomes EU Law
    • An Introduction to EU’s Markets in Crypto-Assets (MiCA) Law 
    • Supply Chains and Blockchain Technology
    • The DeFi Revolution
    • How DeFi Fulfils the Functions of Finance
    • Taxonomy of Crypto Assets
    • Crypto Currencies
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    • Interview with Tradeshift
    • Interview with Kyriba
    • Interview with Orbian
    • Interview with Crossflow
    • Interview with Dancerace
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