As a quick overview, Factoring is a form of business financing whereby a finance company purchases your outstanding accounts receivable at a discount and provides you with an immediate advance against the outstanding invoices in order to increase business cash flow.
Factoring is more commonly used when traditional bank working capital facilities cannot provide sufficient leverage against good quality accounts receivable.
What I would call traditional factoring was based on a customer notification model and was very controlling on the part of the factor. With notification, the financing company or factor would basically take over the contact and collection process with your customer.
The factor would essentially inform your customer that certain invoices outstanding with the customer were sold to the factor. The factor would invoice the customer for payment, collect payment, and provide any residual balance after deduction of fees back to you.
For many companies that qualified for factoring, the notification and customer control process left them uneasy and in many cases resulted in businesses taking a pass on what otherwise would have been a great form of working capital financing for their business.
Business owners did not want their customers to get the wrong impression about the financial health of their business when all of a sudden a financing company gets directly involved in the collection process, nor did they want to risk customer service issues to a forced third party interface.
To better serve the market, Factors are now offering Non Notification financing to more and more of their clients.
Under Non Notification Factoring, the financing company does not contact your customer and lets you remain in control of the transaction including the collection process. Your customer would still issue payment to your business and you would in turn forward the check to the Factor to be cashed in a joint bank account with both yourself and the factor named on the account. Wire transfers would go directly into the joint account.
In this manner, the factor is controlling much of their risk at the end of the process with the cashing of checks or receipt of wire transfers.
A business still has to qualify for non notification financing with respective accounts receivable financing companies. There may be cases where some Factors only feel comfortable offering Notification financing based on the risk assessment for a given account.
But for those that do qualify, Non Notification Factoring can be a powerful financing tool for a growing business.