A payoff letter is a written statement from a factor or lender showing exactly what must be paid to close out the relationship on a given date. It also commits the creditor to release its claims once payment arrives.
How it works in factoring
Payoff letters are central to switching factors, moving to a bank line, or closing a business. A complete letter typically includes:
- The payoff amount as of a specific date, broken down into advances, accrued fees, termination fees and other charges
- A per-day amount to adjust for funding a day or two later
- Wire instructions for the payment
- A commitment to file a UCC-3 termination, return any reserve balance, and reassign open invoices
- Instructions for redirecting customer payments, including how misdirected payments after payoff will be forwarded
The new financier will usually insist on a payoff letter before funding, because it needs certainty that the old lien will be released.
Illustrative example: A payoff letter lists $82,000 in outstanding advances, $1,900 in accrued fees, and a $2,500 termination fee as of the 15th, with a per-day amount of $45. Funding on the 17th means paying $86,490.
What to check
- That the amounts match your own records of open invoices and reserves
- That the letter covers all obligations, not just some of them
- That release language includes the UCC-3 and any deposit account control agreements
- The expiration date of the quoted amount
Ask early. Some factors take several days to prepare a payoff letter.