Non-notification factoring is a form of receivables factoring that minimizes interactions between the factoring company and your customers. It avoids most concerns associated with factoring and enables clients to operate with fewer restrictions. In this article, we cover:
- What is non-notification factoring?
- How does non-notification factoring work?
- Service costs
- Qualification requirements
- Is sales ledger financing a better option?
What is non-notification factoring?
One of the main concerns clients have with factoring is that it requires participation from the factoring company in your invoicing process. Specifically, client concerns arise from the use of a notice of assignment (NOA) and from the invoice verification process.
As part of their risk management process, factors send a client’s customers a notice of assignment letter. The letter advises the client’s customers about the factoring relationship and notifies them to remit payments to a new address. The second concern deals with the invoice verifications process, which factors use to ensure invoice accuracy. Factoring companies verify invoices to ensure the amounts are correct. This process ensures that the invoices are accurate and have been sent to the client’s customers.
Non-notification factoring offers a similar solution to conventional factoring but has two significant differences. The solution does not require a notice of assignment. Additionally, invoices are verified through a more customer-friendly process. These modifications create a better experience for clients.
Note: Some factors also refer to this solution as “confidential factoring.”
How does non-notification factoring work?
For the most part, non-notification factoring programs work just like conventional factoring plans. Your customers must have good business credit, transactions are funded in two installments, your clients still send payments to the factor, and so no. However, non-notification plans differ in three key areas.
1. Client communications
In a non-notification program, communications with your customer are minimized, so the factor’s involvement is almost transparent. When necessary, direct communication is done using your corporate image and letterhead. This approach improves the customer’s experience. There is one important detail to keep in mind. The factoring company retains the right to notify your client in the event of a covenant breach or serious default.
2. Change of payment address
Your customer’s payments must still be directed to the factoring company. However, the factoring company no longer uses the standard NOA language. Instead, they send a letter with your letterhead informing them of the new payment address or ACH account. This is no different from notifying your customer’s Accounts Payable department of an address change.
3. Invoice verifications
Invoices factored through a non-notification program still need to be verified. However, the factoring company contacts the customer using your corporate letterhead and identity. Phone calls are usually conducted using your corporate name. This approach eliminates confusion when contacting your customer’s Accounts Payable department.
4. Payment processing
Payments mailed to your company are redirected to a new lockbox address. Payments are made in your corporate name, and the envelope lists your company name next to the address. Electronic payments via ACH or wire transfer are sent to a special deposit account.
The obvious advantage of this program is that it is easier to use than conventional invoice factoring due to its minimal factor involvement. Clients can use a non-notification program to build a track record and then move on to other types of facilities.
The cost of these programs is similar to the cost of a conventional factoring program. There is variability among factoring companies, though few factors offer non-notification financing. Some factors charge a little less for non-notification programs because clients go through a more rigorous underwriting process. Other factors may charge a little more due to the increased risk.
Non-notification programs have more stringent requirements than conventional plans. In general, companies have to be established, have a track record, and have a well-managed invoicing process. Here is a list of qualification requirements:
- Be in the service or manufacturing industries
- Invoice a minimum of $250,000 per month
- Be able to provide 12 months of A/R statistics
- Be willing to factor all the sales ledger
- Have a well-diversified client base
- Have recurring clients (as opposed to one-off transactions)
- Have reliable controls and reporting
- Not be at risk of default or bankruptcy
- Have a reputable management team
- Meet additional requirements based on your transactions
Is sales ledger financing better?
In many cases, companies seeking non-notification factoring should consider sales ledger financing instead. Sales ledger financing is a solution that behaves much like a receivables line of credit. These lines allow you to draw funds as needed, are priced more competitively, and use a borrowing certificate.
Some providers of sales ledger financing occasionally verify some invoices. When they do, it’s usually in your company’s name and relatively transparent to your customer. Sales ledger financing is usually a superior solution to non-notification factoring. The qualification requirements are similar though they vary by factoring company.
Non-notification factoring is a great option for companies that have outgrown conventional lines but can’t qualify for a bank line. It is a stepping stone to conventional financing. Recently, sales ledger financing has become a better alternative for companies that meet the qualification criteria. Sales ledger financing has similar benefits to a line of credit but does not have the stringent underwriting requirements that banks use.
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