A Notice of Assignment (NOA) is a document that factoring companies send to the end-customers of their clients. This document informs end-customers of the factoring financing relationship. Clients usually have some concerns when they learn that a factor 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?
- Financing programs that don’t use a notice of assignment
1. How are factoring transactions structured?
Invoice factoring is a type of financing that helps companies with cash flow problems due to slow-paying invoices. Factoring transactions are not structured like a conventional business loan. Instead, a business sells its receivables to a factoring company in exchange for a payment.
In most transactions, a factoring company buys your receivables and pays for them in two installments. Your get the first installment, called the advance, shortly after selling the invoices. This installment provides immediate cash flow to your business. It usually covers 70% to 90% of the invoice.
The factor deposits the remaining 10% to 30% that was not advanced, less the cost of service, as a second installment once your client pays in full. This second installment settles the transaction. Factoring programs work as revolving lines, and clients can use them as often as needed.
2. How are customer payments handled?
One of the reasons factors offer this service to small companies 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 factoring industry. It is sent to the customer’s Accounts Payable department. The NOA advises the end-customer:
- That a factoring company is managing receivables
- That the proceeds of their invoices have been assigned to the factor
- That payment must be submitted to a new address (usually a bank lockbox)
- Of other items specific to the factor
From the perspective of the factoring company, this letter is critical. In an invoice factoring transaction, you sell the intangible financial rights to your receivables. Since receivables are not physical goods, the NOA allows the factoring 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 factoring companies will work with you to address this concern.
Keep in mind that invoice factoring 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 factoring and how it works.
Each factoring 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) Factoring benefits them
Using factoring benefits your customers financially. Factoring allows you to provide customers with 30- to 60-day payment terms while also offering them good service. This approach allows your customers to use their cash more effectively. Offering terms without factoring 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
Factoring does not necessarily mean that your company is in trouble. You may need to remind your customers that companies use factoring to achieve many objectives. This is true for any type of financing, including loans and lines of credit. Factoring is just a tool that smooths your cash flow.
5. Financing programs that don’t use an NOA
Some companies may avoid using an NOA if they qualify for some enhanced forms of receivables financing. There are two possible alternatives.
a) Non-notification factoring
A non-notification factoring plan works just like a regular factoring plan with a couple of exceptions. The most important difference is that the customer does not receive a conventional Notice of Assignment. Your customers still send payments to a new address. However, they are not told that the address belongs to the factor. Most factoring companies that offer this service send the change of address using your regular letterhead.
To qualify for non-notification factoring, companies have to meet these criteria:
- Minimum of $300,000 monthly revenues
- Track record longer than a year
- Reliable financial reports
- No serious financial difficulties
If your company qualifies for non-notification factoring, you should consider sales ledger financing instead. The qualification requirements are similar, but we believe sales ledger financing is a better solution.
b) Sales ledger financing
A sales ledger financing line operates much like a receivables line of credit. Your company can draw up to 90% of its outstanding receivables at any given time. These lines are much more flexible than a non-notification line. They operate with a borrowing certificate, so there is no need to submit a factoring schedule of accounts each time you need funds.
The finance company still handles payments. However, your customer does not get a Notice of Assignment. Instead, they get a letter indicating that the payment address has changed.
The qualification requirements are similar to the qualification requirements of non-notification factoring. We believe it is a better solution because advances are flexible, and lines usually have daily rates. This feature allows you to have better cost control. The qualification requirements include:
- Minimum of $300,000 monthly revenues
- Minimum 1- to 2-year track record
- Reliable financial reports
- Good receivables management systems
- No serious financial difficulties
Get more information
Are you looking for a factoring quote? We are a leading factoring company and can provide high advances at low rates. For information, call (877) 300 3258.
Note: The Notice of Assignment document and your factoring contracts 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.