What actually happens in a factoring buyout?
A buyout is a purchase of your open factored receivables from one funder by another, closed on a single day. The new factor wires the incumbent the outstanding funds employed plus earned fees, the incumbent assigns the invoices and releases its lien, and from that point your customers pay the new factor.
This page covers the mechanics and documents. If you are still deciding whether to switch, or dealing with an incumbent that will not cooperate, start with switching factors, which covers the owner’s side of the process. To estimate your own payoff, use the factor buyout estimator.
What is a buyout letter and what should it include?
The buyout letter (also called a payoff letter) is the incumbent factor’s written statement of exactly what it needs to be paid to release its interest. The new factor relies on it to wire funds, so every figure needs to be precise and good through a stated date.
- Funds employed: total advances outstanding against open invoices.
- Earned fees through the payoff date, with a per-diem amount if closing slips.
- Early termination or exit fees, if the agreement provides for them.
- Schedule of open invoices by customer, invoice number, amount and date.
- Wire instructions and the date the figures expire.
- Commitment to release: an agreement to file a UCC-3, assign invoices and send or sign notices of reassignment upon receipt of funds.
Ask for the buyout letter in writing early. Some agreements require 30–90 days of notice before termination. Missing the notice window can roll you into another term or trigger a fee, so read your termination clause before anything else.
How is the payoff amount calculated?
The new factor is buying the incumbent’s position, which equals the money the incumbent has in your invoices plus what it has earned. Your reserves are not lost; they move with the invoices.
| Line item | Amount | Notes |
|---|---|---|
| Face value of open factored invoices | $800,000 | From the incumbent’s schedule |
| Funds employed (80% advance) | $640,000 | What the incumbent has outstanding |
| Earned fees to payoff date | $18,000 | Per the incumbent’s fee schedule |
| Early termination fee | $8,000 | Only if the contract provides one |
| Total payoff wired to incumbent | $666,000 | Per the buyout letter |
| New factor’s advance at 90% on eligible AR | $720,000 | If all $800K is eligible |
| Net cash to you at closing | $54,000 | $720,000 minus $666,000, before new-factor fees |
What is a reserve true-up?
A reserve true-up reconciles the reserves your incumbent held against what the new factor will hold under its own terms. If your new advance rate is higher, as in the illustration above, the difference often comes to you as cash at closing. If it is lower, or if some invoices are ineligible with the new factor, you may need to cover a shortfall.
Ineligible invoices are the usual culprit. The new factor may refuse invoices over 90 days old, disputed invoices or customers it will not approve. The incumbent typically keeps those, or you buy them back. Agreeing in advance how these are handled avoids a closing-day surprise.
Which lien filings change at closing?
The incumbent’s UCC-1 financing statement is what gives it priority over your receivables. At closing, one of two things happens. The incumbent files a UCC-3 termination ending its filing, and the new factor files its own UCC-1. Or the incumbent files a UCC-3 assignment transferring its filing to the new factor, which preserves the original filing date.
The new factor will run a fresh UCC search before closing to confirm no other liens appeared. If there are tax liens or other creditors, those must be resolved or subordinated. See UCC liens and intercreditors.
How do customers learn to pay the new factor?
Each customer receives a notice of reassignment telling it that receivables previously assigned to the incumbent are now assigned to the new factor, along with new remittance instructions. Ideally both factors sign it, which makes AP departments change instructions faster.
Expect a transition period of 30–60 days where some payments still go to the old factor. A good buyout agreement requires the incumbent to forward misdirected payments promptly. Government receivables need a new assignment under the Assignment of Claims Act, which adds time.
How long does a factor buyout take?
A cooperative buyout on clean receivables commonly closes in 2–4 weeks from the new factor’s term sheet. Delays come from notice periods in the existing agreement, slow payoff letters, government reassignments or an SBA or bank intercreditor that needs re-signing. If an SBA lender is involved, see factoring with an SBA loan.
| Step | Typical timing |
|---|---|
| Review current contract and send termination notice | Day 1 |
| New factor issues term sheet; underwriting begins | Days 1–5 |
| Request and receive buyout letter | Days 3–10 |
| Approve open invoices and agree on ineligibles | Days 5–12 |
| Closing: wire payoff, UCC-3 filed, notices of reassignment sent | Days 10–20 |
Step by step
- Read your current agreementFind the term, renewal date, notice period and any early termination fee.
- Estimate the payoffUse the factor buyout estimator with your open invoices, advance rate and fees.
- Get a new term sheetMake sure the new factor’s advance and eligibility rules cover your current open invoices.
- Request the buyout letterAsk the incumbent for a written payoff with a good-through date, invoice schedule and wire instructions.
- Close in one dayNew factor wires the payoff, incumbent files a UCC-3 and both sign notices of reassignment to customers.
Illustrative scenario
Distributor leaves a factor charging 30-day blocks
A wholesale distributor factoring about $900K of monthly sales was paying a flat fee in 30-day blocks. Its customers paid in 33–38 days, so most invoices were billed two full periods. The contract was coming up for renewal with a 60-day notice window.
- Termination notice sent inside the window to avoid auto-renewal
- New factor approved $1.1MM of open invoices and declined $40K over 90 days, which the incumbent retained
- Buyout letter covered funds employed, earned fees and per-diem; no exit fee because notice was timely
- Incumbent filed a UCC-3 assignment; notices of reassignment co-signed by both factors
Outcome: The distributor moved to a tiered fee charged in 10-day increments after the first 30 days, and the higher advance rate produced a modest cash true-up at closing.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
Can I switch factoring companies before my contract ends?
Usually yes, but there may be an early termination fee. Many contracts allow exit with notice and a fee based on remaining term or minimum volume. A new factor will often build that fee into the buyout so you do not need cash to leave.
Do I lose my reserves when I switch factors?
No. Reserves move with the invoices. The new factor pays the incumbent only its funds employed and earned fees, and the reserve balance is reconciled in a true-up. Depending on advance rates, you may receive cash or need to cover a small gap.
What if my factor will not give me a payoff letter?
Most factoring agreements require one upon proper notice, and most incumbents comply because they are being paid in full. If yours stalls, the new factor’s counsel can send a formal demand. Persistent refusal is unusual and usually tied to a dispute that needs to be resolved.
What is the difference between a UCC-3 termination and a UCC-3 assignment?
A termination ends the incumbent’s filing, and the new factor files its own UCC-1. An assignment transfers the incumbent’s filing to the new factor, keeping the original filing date. Either way the new factor ends up with first priority on receivables.
Will my customers be confused by switching factors?
There is usually a short adjustment as AP departments update remittance instructions. A notice of reassignment signed by both factors helps. Your new factor should also follow up with customers that keep paying the old address.
Can a factor buyout include paying off MCAs too?
Yes. If you have merchant cash advances alongside your factor, the new factor can pay those off at closing as well, provided receivables support the total. Each MCA holder must provide a payoff and terminate its UCC filing.