For businesses exploring invoice financing, one common question often arises: Will my clients know I am financing my accounts receivable? The answer largely depends on the type of invoice finance arrangement you choose. This article delves into disclosed invoice finance, explaining how it works, its implications, and when it might be the right choice for your business.
What is Disclosed Invoice Finance?
Disclosed invoice finance is a type of invoice financing where the factoring company notifies the customer that the invoice has been sold to a third-party financier. This type of financing, also known as “disclosed factoring” or “notification factoring,” involves the factoring company taking control of the invoice and collecting payment directly from the customer. In this arrangement, the customer is fully aware that the invoice has been sold to a third-party financier and is instructed to make payment to the factoring company instead of the original business.
This method of invoice financing provides businesses with immediate cash flow by converting their outstanding invoices into working capital. By leveraging disclosed invoice finance, companies can improve their cash flow, reduce the burden of unpaid invoices, and focus on growth and operations without worrying about delayed payments.
Confidential Vs Disclosed Invoice Finance
invoice financing company usually offer both types of invoice finance. Before we dig deeper into the NOA process, let’s go through an overview of both disclosed and confidential invoice finance facilities.
What are the main differences?
A confidential (a.k.a non-notified) facility is when the financier does not require that your customers be notified of the financing arrangement. Financiers consider a confidential facility higher risk and therefore facility limits are usually lower, and discount (interest) rates higher.
A disclosed (a.k.a. notified) facility is when your customer is notified of the financing arrangement. As this is deemed a lower-risk facility, you are often offered higher facility limits, and discount (interest) rates are usually lower. Factoring fees are deducted from the total invoice amount when the factor pays the business a portion of that amount upfront.
Similarities between confidential vs. disclosed facilities
Regardless of facility type, all invoices under the facility are assigned to the financier as well as rights to payment pertaining to those invoices.
For any payments received for non-funded invoices, the financier will passthrough funds to your business bank account within 24 hours of receiving its remittance.
Understanding the Notification Process
The notification process in disclosed invoice finance is a crucial step that ensures transparency and clarity between all parties involved. The factoring company or the business itself sends a Notice of Assignment (NOA) letter to the end customer, informing them that the invoice has been sold.
Preparing for Customer Notification
Before notifying customers about the sale of invoices, businesses should take several preparatory steps to ensure a smooth transition. These steps include:
- Reviewing customer contracts and agreements to confirm that they permit the sale of invoices to a third-party financier.
- Gathering all necessary documentation and information required by the factoring company.
- Informing the accounting and finance teams about the change in ownership of the invoices.
- Developing a plan to handle customer inquiries and concerns regarding the notification process.
By thoroughly preparing for customer notification, businesses can minimise disruptions and maintain strong customer relationships. This proactive approach ensures that both the business and its customers are well informed and ready for the transition, thereby facilitating a seamless process. If in doubt, always seek support from factoring companies.
Preparing Notice of Assignment letter?
Every financier will have their own version of an NOA letter. With InvoiceInterchange, an NOA template will be provided for you to complete and send it on to your customer. The template essentially informs your customer of the financial arrangement and the new bank account details to which the customer will pay future invoices to.
The NOA will contain the following information:
- Confirmation that the invoice has been sold to the factoring company
- The amount of the invoice
- Payment terms and due date
- Contact information of the factoring company for payment and inquiries
Your customer will then confirm and acknowledge the assignment and new payment instructions by returning an Acknowledgement of the Notice of Assignment.
This notification process is vital as it ensures that the customer is aware of the change in ownership of the invoice and knows exactly where to direct their payment. By clearly communicating these details, the factoring company helps prevent any confusion or delays in payment, thereby maintaining a smooth and efficient cash flow for the business.
How to send the NOA?
Larger companies generally are very familiar with an NOA and have a standard process in place. Typically, the contact point is your customer’s Finance or Accounts Receivable department. It can take as soon as one day to a couple of weeks to complete the NOA process – this is very much dependent on how quickly your customer acknowledges the NOA.
Do you have questions? Speak to one of our team members with no obligations.
Managing Customer Relationships
Effective management of customer relationships is critical in disclosed invoice finance. Businesses should prioritise clear and transparent communication with their customers about the sale of invoices to the factoring company. Key strategies include:
- Clearly explaining the reasons for the sale and how it benefits both parties.
- Ensuring that the factoring company interacts professionally and courteously with customers.
- Monitoring customer feedback and promptly addressing any concerns or issues related to the notification process.
- Offering incentives or discounts to customers who pay their invoices promptly to the factoring company.
By managing customer relationships effectively, businesses can maintain a positive reputation and minimize any potential negative impacts. This approach not only helps in retaining customer trust but also ensures a steady and reliable cash flow through timely payments.
