Invoice assignment is usually part and parcel of an Invoice Financing or Factoring facility. So, what does it really mean?
What is an assignment of an invoice?
It is the process that takes place to legally assign the rightful ownership of the selected invoice to another party, typically by sending a Notice of Assignment (NOA) letter to your customer to inform them of this. In the case of Factoring, it is assigning your outstanding customer invoice to your financier so that the financier has the right to collect all payments associated with the selected invoice.
Why do you need to assign your invoice?
As part the financing agreement, your business has agreed to ‘sell’ your selected invoice to your Factoring provider. Your business would then be able to receive early payment of up to 90% from the Factoring provider instead of waiting 30, 60 or 90 days for your customer to pay.
On the other side, your Factoring provider has ‘purchased’ the selected invoice. This means your customer will now make payment directly to the financier (who has ownership of the invoice) rather than to your business. After settlement, the Factor will return any remaining balance to your business less the agreed fees.
How do you execute a Notice of Assignment (NOA)?
The process is relatively simple and may vary slightly between Factoring companies. Below is an example:
- Your business sends a Notice of Assignment (NOA) letter to your customer, stating the transfer of invoice ownership to the Factoring company as well as an updated payment instruction with new bank details.
- Your customer provides an acknowledgement to the NOA letter.
What happens if your customer still pays you instead of to the financier?
This scenario could still transpire even when the NOA letter was sent and acknowledged by your customer. As the invoice has been assigned, your customer is legally obligated to make payment on the invoice to the factoring company. Resolution in such circumstances will normally be on a case-by-case basis and you will be advised by your Factoring provider.
