In understanding the notice of assignment’s (NOA) both concept and procedure, it is crucial first to understand what does invoice factoring mean. As well as how does it work. Invoice factoring also referred to as Accounts Receivable (AR) factoring. This 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 AR to your factor at a discount.
After setting an agreement, your factoring company will provide you with an advance payment. This can be in as little as 24 hours and up to 92% 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. This depends on the initial terms on conditions; they are the ones to collect the debt and not your business.
The factoring company 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. Mainly because 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 constant 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 to get funding. 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. This is because 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 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 with the payment;
- Legal points.
What will your customers think if you are factoring?
Concerns about this notification are very common. There is nothing to worry about. While some of your customers might be unaware of invoice factoring, the majority will be familiar with the concept. This is especially true if you are dealing with big companies that have a reliable 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. Usually takes 30 to 90 days. This specific situation may not be able to do if you are struggling with your cash flow. Therefore, invoice factoring boosts your cash flow. Also, this 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. Not only factoring companies are very delicate when dealing with your customers and treat them with respect. However, they do not harass them with endless phone calls or emails. They only use NOA 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.