In a factoring relationship, you agree to assign your selected receivables to the factoring company. By advancing you cash against your invoices, the factor has purchased the right to collect amounts due from your customers. The Notice of Assignment reflects this change in invoice ownership and is a critical part of your factoring paperwork package.
What is a Notice of Assignment?
The Notice of Assignment is a simple letter that the factor company will send to your customers whose invoices you are factoring. The notice informs your customers in writing that the accounts receivable have been assigned and future payments should be made payable to the factoring company. The notice will also include a remittance address so your customer can change their payment information.
Most importantly, the Notice of Assignment is a legal explanation to your customers that any payments they make to you instead of to the factor (payment over notice) will not satisfy their obligation. If your customer chooses to ignore the notice or fails to update their payment information, the factor may hold them liable for amounts they have misdirected.
While many factors will require your customers to sign and return a copy of the notice to acknowledge receipt, this is not always required. Instead, the Notice of Assignment may include language that considers your customer’s continued use of your services to constitute agreement to the notice. A Notice of Assignment may only be revoked if the factor sends a signed and notarized release notification to your customers. They will do this if you choose not to factor that account any longer or you end your factoring relationship, AND if the account has no outstanding balance, in either case.
Why do Factoring Companies Notify Your Customers?
For a factoring company, the Notice of Assignment is a vital protection. It serves to protect the factor in case the payment is sent to the business owner (the factor’s client) instead of the factoring company’s address.
In a best-case scenario, the notice ensures that every party in a factoring transaction is fully informed of their rights and responsibilities. It also gives your customer the appropriate address to make payments on their account, allowing your factoring relationship to continue smoothly.
In a worst-case scenario, a factor is able to recover unpaid amounts from your customer should they continuously pay over notice or not pay at all. A Notice of Assignment is evidence in any legal proceeding — from a demand letter for payment to a full-fledged lawsuit — that asserts the factor’s standing and rights to payment.
Why Notification Matters To You
You will receive a copy of the Notice of Assignment that the factor sends to your customers. While the notice is to inform your customers, it also has an important implication for you as well.
As your factoring agreement will explain, any payments your company receives from your customers over notice are payable to the factoring company. Even in the smoothest transition, you may receive payments that were sent before receipt of the notice or that were released before your customers’ payment system was updated. There will likely be a provision explaining the procedure for sending misdirected payments to the factor in these cases, usually by overnight check or via bank transfer.
However, you may be responsible for additional penalties and fees if your customers continue to pay over notice, and you deposit those payments into your own account. Depending on your fee structure you may end up owing more due to the extra time it takes for the factor to receive payment. Some factors include a misdirected payment fee in the factoring agreement that you will have to pay if you fail to return misdirected payments to the factor, which may be higher if you were responsible for the misdirection.
As with the other elements of your factoring relationship, be sure that you are fully aware of the language used within the Notice of Assignment. Also, be aware of your customers’ responsiveness to the notice, and take action immediately if you realize that any of your customers are not sending their payments on time. This transparency solidifies your factoring relationship, builds trust with your factor, and protects your interests.
What if the Payment is for an Invoice I Didn’t Factor?
When you assign your customers’ receivables to your factoring company, you agree that all payments – even those for invoices you did not factor – will be directed to the factor. This is to eliminate complications for all parties and to ensure that the factoring company receives every payment they should. Without an all-inclusive assignment, your customers would have to be notified every single time you factor an invoice. They would have to retain two addresses on file, increasing the likelihood of misdirected payments.
Your factoring company will have a clear procedure in place to address non-factored payments, which may include applying those payments to open invoices and sending you the difference or sending you the full amount in a regularly scheduled reserve release. Ask your factor about their policies surrounding non-factored payments so you are prepared.
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