The Notice of Assignment (NOA) is a document that factoring companies use to notify your customers that your company is using invoice factoring. Most factors have a customised version of the NOA. However, the NOA usually informs your customers:
- That you are working with a factoring company
- To submit payments to a new account/address
- About the factoring company’s financial rights
Why do factoring companies use a NOA?
Invoice factoring transactions use a different structure than conventional financing transactions. In most cases, the factor purchases your accounts receivable in exchange for an immediate payment. The factoring company isn’t lending money to your company. The Notice of Assignment serves the purpose of advising your customer that the invoice has been factored and payment is due to the finance company.
What will customers think?
Some clients have concerns regarding what their customers will think about the factoring relationship. This concern is understandable. However, factoring is well-known since it’s a common way of financing small companies. It is widely used in many industries, including business services, oilfield services, transportation, and staffing.
Some smaller customers may not be familiar with factoring and could have concerns about the service. These concerns can usually be resolved by discussing the following three points.
a) Factoring benefits your customers
Companies get factoring because they have low cash flow, but their customers ask for net-30-day payment terms. A factoring line enables you to offer your clients net-30 days terms, which is to their benefit.
b) Your company still provides services and support
Explain to your customers that your company will still manage all delivery, service, and support issues. Your customer will deal with familiar people. The factoring company handles only the processing and receipt of payments.
c) Your company is not in trouble
Some clients are concerned that their customers will think they are in financial trouble. Factoring is a financing solution, just like bank loans and other problems. Getting financing does not necessarily indicate financial problems. It’s a tool that helps smooth out operations and growth.
Are there options that don’t require notification?
There are some forms of accounts receivable financing that do not require notification. These solutions minimise (or even eliminate) the need for your customers to be notified. However, they have far stricter qualification requirements than conventional factoring lines.
a) Non-notification factoring
A non-notification factoring line is similar to a conventional factoring line, except that your client does not receive a Notice of Assignment. However, they may get a direction of payment notice using your company’s letterhead (note: the process varies). To qualify for a non notification line, companies usually must:
- Have a minimum of $1,000,000 in A/R
- Be profitable
- Show a track record of 12 months
- Be able to provide reliable financial statements
b) Asset-based loan
Another alternative is to use an asset-based loan structure only on your Accounts Receivable. These lines are structured to behave like a line of credit secured by A/R. They are also priced differently and may be slightly cheaper than conventional factoring lines of similar size. However, these lines have a minimum of $1,000,000 of A/R and often come with covenants.
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