How to Switch Factoring Companies Without a Gap in Funding

Businesses switch factoring companies for a handful of reasons. The fees turned out higher than the proposal suggested. Funding slowed down. The factor won’t fund a new customer you just landed. Or your volume grew past what they can handle. Whatever the reason, the switch itself follows the same steps, and the one that catches people out is timing: when the old factor stops funding and the new one starts.

This guide walks through each step in order, then shows a worked example of the money at cutover.

Step 1: Read Your Current Agreement First

Before you talk to anyone, find your signed agreement and note these terms. They decide when you can leave and what it costs.

If anything is unclear, ask your current factor in writing. Their answer becomes part of the record if there’s a dispute later.

Step 2: Get Proposals Before You Give Notice

Line up your new factor before you give notice. Giving notice first can leave you without funding if the new approval takes longer than expected.

A new factor will usually ask for:

• An accounts receivable aging report
• A list of your customers and their payment terms
• Your current factoring agreement and a recent statement from your factor
• Sample invoices and, for staffing, how your clients approve hours
• Business formation documents and a voided check

Compare proposals on the same invoice. Ask each factor what you’d pay on an invoice your customers pay in their usual number of days, not just the headline rate. Our guide to invoice factoring costs shows how to make that comparison.

Step 3: Give Notice Exactly as the Contract Requires

Send termination notice in the form your agreement specifies, to the address it names, inside the notice window. Keep proof of delivery. If the contract says certified mail, an email isn’t enough.

In the notice, ask the factor to confirm three things in writing: the termination date, the early-termination fee (if any), and how open invoices will be handled.

Step 4: Request a Payoff Letter

The payoff letter is the document that makes a clean switch possible. It states exactly what you owe the old factor as of a given date. It should show:

• The advances outstanding on invoices that haven’t been paid yet
• Fees earned to the payoff date
• Any early-termination fee or other exit charges
• Any reserve the factor is holding, credited against the total
• A good-through date, and a daily amount if the payoff runs past it
• Wire instructions
• A commitment to release the lien and notify your customers once the payoff is received

Check the math against your own records. Get any error corrected before money moves.

Step 5: Choose a Buyout or a Run-Off

There are two ways to move your open invoices.

Buyout. The new factor pays the old factor the payoff amount and takes over the open invoices. Everything moves on one date, your customers get one change of payment instructions, and you deal with one factor from then on. This is the most common way to switch, and it’s how Sigma takes on clients from another factor. We pay your current factor directly.

Run-off. The old factor keeps collecting the invoices it already bought, and new invoices go to the new factor from the cutover date. No large payoff is needed, but for a few weeks some customers pay the old factor and some pay the new one. It only works if the old agreement allows it and the old factor’s lien covers only the invoices it bought.

Step 6: Release the Lien and Redirect Customer Payments

When you signed with your current factor, it filed a UCC-1 financing statement giving it a lien on your receivables. It also sent each customer a Notice of Assignment telling them to pay the factor.

Both have to change:

1. The lien. Once paid, the old factor files a UCC-3 to end or narrow its lien. The new factor files its own UCC-1. Until the old lien is released, the new factor can’t be sure it owns the invoices it’s buying.
2. Customer notices. The old factor sends each customer a release letter, and the new factor sends a new Notice of Assignment. Most customers won’t change where they send payment until they see the release letter from the factor they’ve been paying.
3. Payments that land in the wrong place. For a few weeks, some customers will still pay the old factor. Agree in writing how quickly the old factor forwards those payments.

A Worked Example: The Funding Gap at Cutover

This example is hypothetical, not an offer. It shows how a buyout’s numbers fit together, and why the payoff can be larger than the first advance from the new factor.

A distributor has $200,000 of open invoices with its current factor, which advanced 85% on them.

The payoff is more than the new advance because the fees and the exit charge come due on the day you leave. The $21,000 difference between the invoices ($200,000) and the payoff ($179,000) is still your money. After the new factor’s fees, you get it back as reserve once customers pay.

Ways to close the gap:

• Pay it from cash on the cutover date.
• Time the switch for a week when several large invoices are about to be paid, so the outstanding advances, and the payoff, are smaller.
• Run off part of the book. Leave the oldest invoices with the old factor to collect, and buy out only the newer ones, if the old agreement allows it.

Ask the new factor for these numbers on your actual invoices before you pick a date. In a Sigma buyout, the proposal shows them.

Red Flags in a Factoring Agreement

When you read a new agreement, including ours, look for these:

• Automatic renewal with a short notice window, such as 30 days before a 12-month renewal.
• An exit fee calculated on the full facility size, rather than on what you actually factor.
• Monthly minimums with shortfall charges.
• A long reserve hold after termination with no fixed release date.
• An assignment of all receivables when you only want to factor some customers.
• Charges that weren’t in the proposal, such as wire, setup or monthly service fees.

None of these are automatically deal-breakers. You should know about each one before you sign.

How Switching to Sigma Works

Sigma moves you over through a buyout and handles it for you. Send us your current agreement, a recent statement and your aging report. Within 48 hours, you get a proposal showing the payoff and what you’ll receive. Once you sign, we get the payoff letter from your current factor, pay them directly, and coordinate the lien release and the new customer notices. You don’t have to manage the handoff between the two factors.

Here’s what you’d be switching to:

• Onboarding in 24–48 hours from signup, then same-day funding on invoices you submit.
• No hard credit pull on your business. We don’t pull owners’ personal credit reports or scores. Your customers’ credit carries the most weight.
• 80–90% advances on most invoices, with a full advance for freight.
• A fee schedule set by payment period, written into your agreement before you sign. No setup fees, no wire fees, no monthly minimums.
• Reserves released on request once customer payments build a reserve balance.
• A standard 12-month agreement. You can ask for a trial period, and exit terms, such as leaving when you qualify for a bank line, can be written in. Our agreement does carry an early-termination fee, and the proposal states it.
• Recourse factoring, with optional credit insurance that pays when an insured customer fails to pay, under the policy’s terms.

Staffing agencies can see our staffing readiness checklist and payroll example. Manufacturers and distributors can see what we fund on the manufacturing and wholesale distribution pages.

Questions About Switching Factors

Can I leave before my term ends?

Usually, yes, if you pay the early-termination fee your agreement sets. Some agreements also let you leave without the fee in specific situations, such as qualifying for a bank line. Read the termination section and ask your factor to confirm the fee in writing.

Will my customers know I’m switching?

Yes. They’ll get a release letter from your current factor and a new Notice of Assignment from the new one. It’s routine paperwork for most accounts payable teams. Tell your main contacts before the letters arrive so a changed payment address doesn’t look suspicious.

How long does a switch take?

Plan for two to four weeks from signing the new agreement to the first funding: approval, the payoff letter, the lien filings and the customer notices. The notice window in your current contract can add more time, so start there.

What happens to my reserve with the old factor?

It belongs to you. In a buyout, it’s credited against the payoff, so it counts toward what the new factor pays your old one. In a run-off, the old factor releases it as the remaining invoices are paid, on the schedule your agreement sets.

Does Sigma pay off my current factor?

Yes. Sigma pays your current factor directly through a buyout and coordinates the paperwork with them. Your proposal shows the payoff amount and what you’ll receive.

Do I have to move all my customers?

Not necessarily. If your current agreement only covers the invoices you submit, you can move some customers and keep others where they are. If it assigns all your receivables, the old lien has to be released before any customer can move.