How Notice of Assignment Factoring Works for Your Business

You’ve just fulfilled a large order, but the payment is still 60 days away. In the meantime, you’ve got bills to pay and payroll to cover. Invoice factoring can bridge that gap and keep your business running smoothly. However, sometimes businesses have concerns related to notifying their customers about their factoring agreement or what that entails. On this page, we’ll walk you through how notice of assignment (NOA) factoring works, best practices for sending notices, and alternatives to NOAs if you’d like to keep your factoring agreement to yourself.

How Traditional Factoring Works

Invoice factoring is a financial solution that allows businesses to improve their cash flow by selling their outstanding invoices to a third party, known as a factor. This process provides immediate cash to the business, rather than waiting 30, 60, or even 90 days for their customers to pay. Here’s how it works in simple steps.

• Issuing Invoices: A business provides goods or services to a customer and issues an invoice, typically with a payment term of 30, 60, or 90 days.
• Selling the Invoice: Instead of waiting for the customer to pay, the business sells the invoice to a factoring company. The factor pays the business a significant portion of the invoice’s value upfront—usually around 60 to 95 percent.
• Receiving Immediate Cash: The business now has immediate cash flow, which can be used to cover expenses, invest in growth, or manage day-to-day operations.
• Customer Payment: The customer eventually pays the invoice, but instead of paying the original business, they pay the factoring company. Once the payment is received, the factor gives the business the remaining balance, minus a small fee for their services.

This process helps businesses maintain steady cash flow, particularly when dealing with slow-paying customers, allowing them to focus on growth and operations without worrying about delayed payments.

Notice of Assignment Explained

A notice of assignment is a formal document that informs a business’s customer that their invoice has been sold to a factoring company. Essentially, it lets the customer know that they should pay the invoice amount directly to the factor, not the original business. This notice is usually sent by the factoring company after the agreement is finalized.

Why Notice of Assignment is Essential

The notice of assignment serves several important purposes in the factoring process.

Ensures Payment to the Factor

By notifying the customer, the factor ensures that the payment is directed to them, which is crucial since the factor has already provided the business with upfront cash for the invoice. Without this notice, the customer might mistakenly pay the original business, complicating the transaction and potentially causing financial losses or disputes.

Legal Protection

The notice of assignment provides legal backing to the factor’s right to collect payment on the invoice. It makes the transaction transparent and minimizes the risk of double payment or fraud. If a customer fails to pay the factor after receiving a notice of assignment, the factor can take legal action to enforce the payment.

Improves Cash Flow Management

From the business’s perspective, issuing a notice of assignment can help improve relationships with the factor. Since the factor has confidence that payments will be received as agreed, the business may benefit from better terms, such as higher advance rates or lower fees.

Makes Business Funding More Accessible

Businesses, especially those that are smaller, haven’t been in operation long, or don’t have strong credit, often have trouble securing funding. There also tends to be red tape in the funding process and it can take a while for options like loans and lines of credit to pay out. Conversely, it’s easy to get approved for factoring because the factor is more concerned about the creditworthiness of your clients. Payout occurs quickly, too. A business can be approved in a couple of days or less. Payment for an invoice usually occurs within two business days as well, though some factors offer same-day payments.

All of this is made possible because of the unique way factoring works and the sale of the invoice. Because the NOA is a legal component of this transaction, it plays a crucial role in making funding more accessible.

Legal Basis for the Notice of Assignment

The requirement for a Notice of Assignment comes from several legal principles and statutes, depending on the jurisdiction. Here are some key aspects.

Assignment of Receivables

In general contract law, an assignment is the transfer of rights or property from one party to another. When a business assigns its receivables (invoices) to a factoring company, it is transferring the right to collect payment on those invoices. To make this assignment effective, the debtor (the customer who owes the money) must be notified. This is where the notice of assignment comes into play.

Uniform Commercial Code (UCC) in the United States

In the U.S., the assignment of receivables is governed by Article 9 of the Uniform Commercial Code (UCC). The UCC provides a standardized set of laws that regulate commercial transactions, including the assignment of accounts receivable. The notice of assignment is not just a formality. It’s a requirement under the UCC to ensure that the debtor is aware of the new party entitled to receive payment. Without this notice, the debtor might still be legally obliged to pay the original creditor, which could create complications.

Legal Protection and Priority

The NOA also helps establish the factor’s priority in the event of the original business’s bankruptcy or other legal issues. By sending an NOA, the factor ensures that their right to the receivable is recognized and prioritized over other creditors. This is crucial in maintaining the security of the transaction.

Best Practices When Sending NOAs

When it comes to managing the process of sending an NOA, it’s crucial for businesses to be well-prepared and proactive. While the factoring company usually handles the actual sending of the NOA, the business still plays a vital role in ensuring a smooth transition and maintaining positive relationships with their clients. Here are some best practices to keep in mind.

Review the NOA Before It’s Sent

Ask the factoring company for a copy of the NOA before it goes out, and collaborate with them to make adjustments as needed.

Ensure Accuracy

Carefully review the document to ensure all details are correct. This includes verifying the invoice numbers, amounts, and any other pertinent information. Mistakes in the NOA can lead to confusion or delays in payment, so it’s essential to get it right the first time.

Tailor the Communication

Some factors may allow customization of the NOA to fit the tone and style of the business. If possible, the business should work with the factor to ensure that the NOA aligns with their brand and customer communication style. This can help maintain trust and professionalism.

Prepare Clients Ahead of Time

Transparency and how you frame factoring can make a difference in how your clients respond to the NOA.

Inform Key Clients Personally

Especially with major clients, it’s a good idea for the business to inform them about the upcoming NOA before they receive it. This can be done through a phone call or a personalized email. Letting clients know why the business is factoring invoices to manage cash flow and continue providing excellent service can reassure them and prevent any surprises.

Address Concerns

Clients may have questions or concerns about the NOA and what it means for their relationship with the business. Being proactive in addressing these concerns can prevent misunderstandings and maintain a positive working relationship.

Monitor Client Responses

Keep an eye out for responses and be ready to step in as needed.

Follow Up After Sending

After the NOA has been sent, the business should follow up with their clients to ensure they received it and understand the new payment instructions. This is especially important for key accounts or clients who have large outstanding invoices.

Handle Delays or Issues Promptly

If a client is slow to respond to the NOA or seems confused, the business should step in to help clarify any issues. Promptly addressing any problems can prevent payment delays and ensure that the factoring process goes smoothly.

Maintain Clear Records

Because NOAs are generally required by law, it’s important to keep good records.

Document Everything

It’s important for the business to keep thorough records of all communications related to the NOA. This includes copies of the NOA itself, any emails or letters sent to clients, and notes from phone calls. This documentation can be invaluable if any disputes arise later.

Coordinate with the Factor

Ensure that the business and the factoring company are on the same page regarding all details of the NOA. This includes confirming when the NOA was sent and ensuring that both parties have consistent information.

Reinforce the Relationship

Even though the factoring company is collecting payments, your clients will continue working with you on everything else. Reinforcing this relationship early as NOAs are going out can help ensure your clients remain confident that they’re going to continue receiving the same service from you.

Reiterate the Business’s Commitment

After sending the NOA, the business should take steps to reinforce its relationship with the client. Reassuring the client that the quality of service and the business relationship will remain unchanged can help alleviate any concerns they might have about the assignment.

Provide Additional Support

Offer to answer any questions or provide additional information about the factoring process. This demonstrates transparency and builds trust with the client.

Address Potential Payment Discrepancies

Although issues are rare, being prepared for them will help ensure the process goes smoothly for everyone involved.

Prepare for Discrepancies

Despite best efforts, there might still be cases where a client accidentally pays the business instead of the factor. The business should have a plan in place to quickly redirect these payments to the factor and communicate this process clearly to the client.

Ensure Seamless Payment Transitions

Work closely with the factor to ensure that payment transitions are seamless. The factor might require additional documentation or communication if issues arise, so maintaining open lines of communication is key.

Factoring without Notification

Factoring without a notice of assignment, commonly known as non-notification factoring, is an alternative form of invoice factoring where the customer (debtor) is not informed that their invoice has been sold to a factoring company. This type of factoring offers a different set of advantages and considerations compared to traditional factoring with an NOA.

Non-Notification Factoring Explained

In non-notification factoring, the business continues to handle its invoicing and collections as if the factoring arrangement doesn’t exist. The customers pay the invoices directly to the business, and the business then forwards the payment to the factoring company. The customers remain unaware that the invoices have been sold to a third party.

Why Businesses Choose Non-Notification Factoring

There are several reasons why a business might opt for non-notification factoring.

Maintaining Customer Relationships

Some businesses prefer not to disclose their use of factoring to their customers. This could be because they want to maintain a perception of financial stability or avoid giving customers any reason to question the company’s liquidity.

By keeping the factoring arrangement confidential, the business can preserve its brand image and avoid any potential stigma associated with factoring.

Flexibility in Operations

Non-notification factoring allows the business to maintain control over its invoicing and collections processes. This can be beneficial for businesses that have established strong relationships with their customers and prefer to handle communications directly.

The business can continue to operate as usual without any noticeable changes in the customer experience.

Minimized Impact on Client Trust

In some industries, clients may have concerns or misunderstandings about factoring, seeing it as a sign of financial distress. Non-notification factoring allows businesses to avoid these potential issues and continue their operations without disrupting client trust.

How Non-Notification Factoring Works

The process of non-notification factoring is similar to traditional factoring, with a few key differences. Although each factoring company operates uniquely, some common differences between notification and non-notification factoring are covered below.

Invoice Creation

The business issues invoices to its customers as usual. The invoices do not mention the factoring arrangement, so the customer is unaware that the invoice has been sold.

Sale of Invoices

The business sells its invoices to the factoring company, just like in traditional factoring. The factor provides an advance on the invoice.

Customer Payment

The customer pays the invoice directly to the business, not the factor. The business then forwards the payment to the factoring company, after which the factor releases the remaining balance, minus any fees.

Confidentiality

Throughout this process, the customer remains unaware of the factoring arrangement, as all communications and payments are handled directly by the business.

Considerations and Challenges of Non-Notification Factoring

While non-notification factoring offers certain advantages, it also comes with specific challenges.

Higher Costs

Non-notification factoring is generally more expensive than traditional factoring with an NOA. This is because the factor assumes more risk by not being directly involved in the collection process. The factor must rely on the business to remit payments promptly, which increases their risk and costs.

Creditworthiness and Trust

Factoring companies typically offer non-notification factoring only to businesses with strong credit and trustworthy management. Since the factor is not involved in collections, they need to have confidence that the business will manage the process efficiently and honestly. This is in contrast to traditional factoring, as factors typically focus more on the creditworthiness of the clients paying the invoices.

Potential for Mismanagement

There’s a risk that the business might delay forwarding payments to the factor, whether intentionally or due to cash flow issues. This could strain the relationship between the business and the factor, potentially leading to complications in the factoring agreement.

Limited Availability

Not all factoring companies offer non-notification factoring. Those that do may have stricter requirements for businesses to qualify, making it less accessible for some companies.

Accelerate Your Cash Flow with Factoring

NOAs are a part of most factoring agreements and rarely create any friction in the process for businesses or their customers. However, if you prefer for your factoring to have a lower profile, you can opt for non-notification factoring instead. Invoice Factoring Guide can match you with a factor offering your preferred method at no cost to you and with no obligation to retain their services. If you’d like to take the first step toward accelerating your cash flow, request a complimentary rate quote.

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