What are excessive termination fees on cancelling a factoring agreement?

Reviewed: 6th September 2017

If you’ve signed a factoring agreement, it’s likely to include a settlement fee that becomes payable if you cancel the arrangement early. Factoring companies incorporate this provision into their contracts so they aren’t out-of-pocket should the client end the agreement early.

This settlement fee is intended to cover their costs, and is an understandable requirement for those lending money. In some cases the fee levels can be questionable, however, and cause severe financial issues for the debtor company.

So if you need to cancel your factoring agreement before its natural conclusion, what can you do to avoid or minimise these early termination fees?

How to avoid high termination charges for invoice factoring

Be prepared to negotiate hard for what you want prior to signing the contract, and in particular, argue for reasonable settlement fees in relation to early termination. Although ending a factoring agreement early isn’t ideal for either party, it may be unavoidable in some instances, and you want to make sure this option is viable if the need arises.
Understanding your factoring agreement is the key to avoiding early termination fees. You need to know what is expected of you, so take the time to read the fine detail and seek professional advice if you’re unsure about any aspect. Look for the minimum contract term, notice periods required, and the cost of termination.
Plan ahead to minimise the chances of having to cancel a factoring agreement. Although there are various reasons why you might need to end an agreement early – maybe your business requirements have changed, for example, or you’d prefer to use a confidential arrangement - you can minimise the likelihood by forecasting your financial requirements for the next 12-month period.

What to do if you need to terminate your factoring agreement early

Your contract will stipulate the terms and conditions for early termination - minimum notice periods and fees should be clearly stated in the agreement. If you still wish to cancel, it’s wise to seek professional assistance to help you negotiate a better deal with your existing lender, or to find a different source of working capital that meets your requirements.

Alternatively, it may be financially beneficial to let the agreement run its course without terminating early. Our experts at Real Business Rescue will guide you on this and any other available options, providing independent advice to minimise the disruption and cost to your business.

Professional help to deal with early termination charges

If you’re looking to change factoring providers, or move to a different form of alternative lending, we’ll help you negotiate beneficial terms and assist during the product migration if required.

Real Business Rescue can help firms affected by high cancellation charges. Depending on your reasons for termination, we’ll offer professional guidance on the best way forward. We also have contacts with over 50 alternative lenders in the UK if you need access to a cash lump sum, or to another form of lending. Call to arrange a free same-day consultation – we operate from 55 offices nationwide.