Non-notification factoring, also called confidential factoring, is a kind of factoring relationship where there is minimal involvement from the factoring company. The seller typically retains the responsibility of collecting on the factored invoices, thereby limiting any interaction between the factoring company and its clients.
In cases when a factor needs to communicate with a seller’s customers, the factor will typically use the seller’s official name or letterhead to ensure that the customer remains unaware of the factoring relationship. This type of factoring is used in industries where customer relationships are critical, and invoices are not typically factored like retail.
Issues With Conventional Factoring
In industries where factoring is common, having a factoring company collect an invoice from a debtor is common practice. In fact, in some industries like manufacturing, its unusual not to factor invoices. However, some business owners do not want the factoring company managing that relationship or can’t risk their debtors knowing that they are factoring invoices. To address the needs of these business some factoring companies started offering non-notification factoring.
How Non-notification Invoice Factoring Works
Non-notification factoring works like traditional factoring, except that the factor ensures that debtors remain unaware of its factoring relationship with their supplier. In non-notification factoring, customers send paid invoices to either a lockbox or a deposit account that is branded as the seller’s but is owned by the factor.
While these extra steps can mean slightly higher fees, some businesses prefer to keep their factoring activities a secret. While this is unnecessary in industries where factoring is common, such as freight and transportation, it may signal to buyers in other industries that you may be in poor financial standing. This can have a negative impact on business and result in slower overall growth, making traditional factoring an undesirable option.
Who Non-notification Factoring Is Right For
Non-notification factoring is ideal for companies that want to retain more control of the management of their accounts receivables and who need to keep their relationship with a factoring company confidential.
Some reasons to keep a factoring relationship confidential include:
- Maintaining very personal relationships with customers
- Avoiding the stigma that factoring invoices may carry
- Retaining control of the collections process
Non-notification Factoring Costs, Terms, and Requirements
Non-notification factoring is usually slightly more expensive than traditional factoring. However, the full cost of non-notification factoring should include the additional burden of collecting invoices that the business has to handle.
While the terms of the agreement are the same, the requirements may also be slightly higher. The factoring company will work to determine the effectiveness of your collections process. In particular, the ratio of days beyond terms, or the number of days late that invoices are collected, will be especially important in determining your business’s eligibility.
Pros and Cons of Non-notification Factoring
Non-notification factoring offers small business owners a discrete factoring solution. Customers won’t be aware their invoice has been factored, and the business gets access to the necessary capital. However, it’s typically more expensive and is more difficult to qualify for because the factoring company is covering more risk.
A major downside to consider is the need to handle collections directly. As a business grows, this can mean onboarding additional staff and devoting resources to collecting invoices that would be better used elsewhere. Small business owners considering non-notification factoring should first consider the total cost of collections.
Non-notification factoring is a solution for small business owners that want to borrow against the value of outstanding invoices without notifying their customers of the factoring relationship. It can be slightly more costly and difficult to qualify for, but most factoring companies offer it as a potential solution.