Quitting factoring

Given all the scare stories about parting ways with a factoring company, I figured I’d post what I’ve been doing with mine the last two months. Kind of long winded, but this is how you do it when your account is in good standing, and not complicated by any claims or other drama.


Those of you that’s followed my posts on the topic know that I’ve been a fan of factoring. To summarize, my experience has been generally positive. I have been with eCapital (formerly known as Freight Capital) since going into business March 2011. For my business, they have served as a part time accounts receivable department for the most part. Over the past 3 years, I’ve also leaned on them from time to time during times cash flow was tight. However, not here to discuss the merits or cost of factoring. Just a story about getting away from it.


In the past year, my business has matured to the point that factoring just isn’t the fit it once was. There’s many steps along that path, the short version is: improvements in both revenue and expenses (more positive cash flow to begin with), along with a now very short list of customers that pay like clockwork, I am just not getting the value from factoring I once did. The thing that finally kicked me into action was hearing dannythetrucker’s story. I won’t rehash that, but you can find it with the search. It was a bad parting of ways, and with the same company I’m with. What that story did for me was highlight the risk my business was exposed to by just having a factoring relationship in place.


I studied my contract before making any calls. 8 pages of tiny print, and two of them just on that the definition of what “good standing” is, along with the process to get accounts released and/or terminate the agreement. All sorts of written notice timelines and fees depending on how you read it. I was now nervous about even calling to ask questions, tipping them off I wanted to quit!


Can’t do this forever, so I sucked it up and made the call. I had just been assigned a new account manager a month earlier, so even more nervous about the call, having no working relationship with the new guy. Turned out to be easy. It was like getting stressed out over a dentist appointment only to find you don’t have any cavities.


We had a really productive call. Turns out the terms in the agreement were intended to make it difficult and expensive to cancel in the event of a disagreement, or to immediately go to another factoring company (buyout). Since neither of those cases applied to me, it was much more simple. As a good client that they really want to keep, most of the inconvenient stuff (timelines, notices by certified mail, etc) could easily be waived.


The process to end my factoring program is in two steps. 1. All assigned accounts reach a zero balance and are released. 2. Cancel the master agreement (terminate).


I was offered an immediate release of any accounts with a zero balance, no charge. Ask and ye shall receive. I already had a bunch of those, so asked for the 8 that I’d most likely book another load with some day soon. Notices went to those customers the same day.


I had two customers that had one invoice pending that would pay within a few days. I let those be, and requested releases as soon as their balance hit zero. One paid fast as a rule, and I held an invoice a couple extra days to see their last payment post, then invoiced them direct after I got the release.


That left my main customer with a large balance. My original plan was to secure a $20k credit line and buy them out. As checks came in, replenish the line. That didn’t materialize, and I’m actually kind of glad it didn’t. So I went to my Plan B…


Taper that balance down over several weeks. What most (good) factoring companies will do is let you fund invoices selectively. Once an account is assigned, they must collect all payments. However, you can opt not to have them fund some or even all of them. If you do that, you get paid when they do and there is no factoring fee. About the only issue with those is a few more days to pay since they have to process payment first before sending it to you. It took about four weeks to take that last customer down to zero and get them released.


I had sufficient cash on hand to keep operating during that time. It turned out to be a closer call than I expected, due to about $5000 in (direct) receivables being a little slow. I’ve managed. My regular invoices are now aged enough to replace what I was doing with the factoring company, but direct now. In my mail box.


My factoring balance has been zero for about two weeks. I have also decided not to do any quick pays either. IMO kind of dumb to go thru all the wrangling to get clear of factoring, only to give up money with quick pay fees. It’s added a little collection overhead and cash flow planning to my life, but definitely not so much that I regret doing this.


If you’re reading this and considering doing the same as I just did, there is one thing that is really important to do: Verify with your customer that they received the factoring release and that you are set up to receive payment directly. Either do it when you get the release, or at least verify when you book that first load you will ultimately invoice for direct payment. It’s also a good time to make sure you’re clear on days to pay terms, in case it’s been a while since you signed their carrier agreement.


I’ve chosen not to terminate the factoring agreement just yet. Call it a security blanket. It doesn’t cost anything and I do still have access to do credit checks if I want. Although I was told the termination timeline would be waived, I’ll probably just wait a few months before ending it. The trigger on the process is contract anniversary minus 60 days. I’ll probably just do it by the book, provided I don’t decide to use them again in the mean time.


I’ll just add one cautionary tale. Don’t just read and understand your contract terms. Get a calendar and a calculator out and really run a scenario to close and cancel the agreement. Get it straight in your head how much money and time it will take to unwind your factoring program, both in a positive way I’ve mentioned, as well as the negative. Know going in what will happen if you have a major claim that jams up a bunch of open invoices. Or a falling out and you decide you want to quit and go to someone you like better. Or, like me, you just decide it’s time to move away from it.

 

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