Early termination is ending a factoring agreement before its term is complete. When a new factor or lender pays off the existing factor so it can take over the client's receivables, the transaction is commonly called a buyout or takeout.
How it works in factoring
A typical buyout follows these steps:
- The client gives notice to the current factor, as required by the agreement.
- The new financier requests a payoff letter showing everything owed: outstanding advances, accrued fees, termination fees and other charges.
- The new financier funds the payoff amount to the old factor.
- The old factor reassigns the open invoices to the new financier, releases its claim, and files a UCC-3 termination.
- Customers receive updated notices of assignment pointing to the new financier.
The payoff usually covers the advances on open invoices rather than their full face value. The client's remaining reserves are applied in the settlement.
Illustrative example: A client has $120,000 in open invoices at an old factor, which advanced an assumed $96,000. Adding $3,000 in accrued fees and a $4,000 termination fee, the payoff is $103,000. The new financier funds it and takes over the invoices.
What to check
- Your notice deadline and termination fee terms
- Whether the payoff letter is complete and includes a per-day amount for timing changes
- That the old factor will release reserves and file the UCC-3 promptly
- How customers will be told about the change, to avoid misdirected payments
Moving factors can lower cost, but coordination matters. A rushed transition can leave payments going to the wrong place.