In the business world, brand image and reputation are key factors of success. How you present yourself as a business as well as your culture, values, and policies is crucial in determining the idea your end customers and potential ones will have about your company. When a business decides to factor its accounts receivable, “will my customers be aware that I am factoring?” is a common question they ask their factoring company. And yes, your customers are notified of this matter. But no need to start stressing, your customers are most likely familiar with the concept and even if not, wouldn’t be against it, once they are informed about the process and how it will support your growth.
What is Invoice Factoring?
In order to understand the notice of assignment’s (NOA) both concept and procedure, it is crucial to first understand what does invoice factoring mean and how does it work. Invoice factoring also referred to as AR factoring or accounts receivable factoring, is a type of debtor finance that grants you funding based on your invoices. It is a financial transaction between a factoring company and your business inducing that you agree to sell your accounts receivable to your factor at a discounted price. Once the agreement is set, your factoring company will provide you with an advance payment, in as little as 24h, and up to 90% of your creditworthy invoices’ value. Now comes the crucial point that worries you, the factoring company notify your customers that after 30, 60 or 90 days, depending on the initial terms on conditions, they are the ones to collect the debt and not your business. You’re your factor receives the money from your customer, the remaining balance is typically returned to your business minus the already agreed service fees. Therefore, factoring isn’t completely transparent as you would have hope, as your customers will receive a notice of assignment document notifying them that hold their invoices. However, this is a one-time notification and your customers won’t be harassed and overloaded with continuous calls or emails.
What is a Notice of Assignment (NOA)?
In general, an assignment occurs when one party holds a right to claims, bills or property belonging to another party and decides to sell it to a third party. In a factoring relationship, your business agrees to assign your chosen creditworthy invoices to the factor in order to be funded. Thus, when your business is provided with an upfront payment of your accounts receivable, the right to collect the debt is passed on to the factoring company you are dealing with. The notice of assignment is then a paperwork formality that reflects this change of the situation.
In fact, the notice of assignment is a crucial step as it identifies the relevant rights and notifies your customers that the invoices’ ownership regarding their transactions with your business has been assigned. It is a legal explanation to your customers that if any payment is misdirected to your business instead of the factoring company, their obligation won’t be satisfied.
Usually, your factor will send a written notification document for your customer to sign and return a copy as a receipt acknowledgment as it is a vital protection for your factoring company in case of misdirected payments. You will also receive an NOA copy when your customers are notified to remind you that any misdirected over notice payment your business might receive, must be sent back to your factoring company via an overnight check or bank transfer. Honesty and transparency are crucial as it will solidify your relationship with your factor, build trust as well as serve and protect your business interests. In case you fail to do so, you might be held responsible and then subject to additional penalties and fees.
What does a Notice of Assignment include?
Because, a factoring transaction is special, in the sense that not only it is about intangible rights, but also involve a third party (your customers), this letter of notification is vital for your factoring company to claim its financial rights to the invoices. Every factoring company produces its own version of the notice of assignment, customized to its needs and policies. However, all existing version serves the same purpose and mention the same major points:
- You have factored your accounts receivables;
- The right of ownership has been assigned to your factoring company;
- The new payment address of your factor and how to proceed the payment;
- Legal points.
What will your customers think if you are factoring?
Concerns about this notification are very common. Yet there is nothing to worry about as while some of your customers might be unaware of invoice factoring, the majority will be familiar with the concept, especially if you are dealing with big companies that have a strong supply chain. In fact, chances are, you are not the only supplier they are dealing with who is factoring. Besides, invoice factoring can also benefit your customers as you will be able to provide them with longer payment terms (30 to 90 days) which you may not be able to do if you are struggling with your cash flow. Therefore, invoice factoring boosts your cash flow and provides you with working capital which ensures them of a healthy supply chain. Finally, the process itself will not disturb your relationship with your customers, as not only factoring companies are very delicate when dealing with your customers and treat them with respect, but they do not harass them with continuous phone calls or emails. NOA is only used to notify of the situation change and claim financial rights. Your customers will understand that your business health is as important to you as it is for them. Most factoring companies will allow you an active role in informing your customers to ensure the whole process is going perfectly.
Is there any alternative to NOA?
The only alternative is the non-notification factoring option provided by some factoring companies and inducing that your customers will not receive a notice of assignment. However, this option is only available to large companies that meet certain stability requirements.