A Notice of Assignment (NOA) is a document that debtor finance companies send to the end-customers of their clients. This document informs end-customers of the invoice finance relationship. Clients usually have some concerns when they learn that a debtor finance company will notify their customers. This article addresses these concerns and explains how the NOA works, why it is needed, and how to discuss it with customers. This article covers the following topics:
- How are factoring transactions structured?
- How are customer payments handled?
- What is the notice of assignment?
- What will your customers think?
1. How are invoice finance transactions structured?
Invoice finance, also called invoice factoring, is a type of debtor financing. It helps companies with cash flow problems due to slow-paying invoices. Transactions are not structured like a conventional business loan. Instead, a business sells its receivables to a debtor finance company in exchange for a payment.
In most transactions, a finance company buys your accounts receivable and pays for them in two instalments. You get the first instalment, called the advance, shortly after selling the invoices. This instalment provides immediate cash flow to your business. It usually covers 70% to 85% of the invoice.
The debtor finance company deposits the remaining 15% to 30% that was not advanced, less the cost of service, as a second instalment once your client pays in full. This second instalment settles the transaction. Invoice finance programmes work as revolving lines, and clients can use them as often as needed.
2. How are customer payments handled?
One of the reasons debtor finance companies offer this service to small businesses is that they take a more “hands-on” approach than conventional lenders. An important part of this “hands-on” approach is notifying the end-customer that the invoices have been purchased and payments have to be remitted to the factor. This notification is done through a Notice of Assignment.
3. What is a notice of assignment?
The use of an NOA is standard and common in the industry. It is sent to the customer’s accounts department. The NOA advises the end customer:
- That a debtor finance company is managing receivables
- That the proceeds of their invoices have been assigned to the finance company
- That payment must be remitted to a new address/bank account
- Of other items specific to the finance company
From the perspective of the finance company, this letter is critical. In an invoice finance transaction, you sell the intangible financial rights to your receivables. Since receivables are not physical goods, the NOA allows the finance company to notify your customers that the financial rights to the invoice have been sold to them.
4. What will your customers think?
Some clients have concerns about sending this letter to their customers. This concern is entirely understandable, and debtor finance companies will work with you to address this concern.
Keep in mind that invoice finance is a very common financing tool. Many small and midsize companies use it to finance operations and growth. As a matter of fact, your customer is probably aware of invoice finance and how it works.
Each finance company has its preferred way of handling the NOA. Most companies suggest that the business owner tell their client that an NOA is forthcoming. This discussion gives them a chance to explain the process and address customer questions. Here are some ideas to keep in mind as you speak to clients.
a) Invoice finance benefits them
Using invoice finance benefits your customers financially. Invoice finance allows you to provide customers with 30- to 60-day trading terms while also offering them good service. This approach allows your customers to use their cash more effectively. Offering terms without financing is difficult, especially if the business is growing.
b) Your company still provides services and support
You need to explain to customers that little is actually changing. Your company still provides all the services and support. They still communicate with you and your employees regularly.
c) Your company is not in trouble
Using invoice finance does not mean that your company is in trouble. You may need to remind your customers that companies use invoice finance to achieve many objectives. This is true for any type of financing, including loans and lines of credit. Invoice financing is just a tool that smooths your cash flow.
Note: The Notice of Assignment document and your financing agreements are very important documents. Have a lawyer review and explain them to you to ensure you understand them. This article is not intended as legal advice.
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Marco Terry is the Managing Director of Commercial Capital LLC and has over two decades of experience in asset-based finance. He has worked with small and mid-sized companies across the United States, Canada, and Australia. Marco holds a Master of Science in Finance.