Invoice assignment is the process by which a small business transfers responsibility for an invoice to an invoice factoring provider in exchange for access to quick capital. The lender is then responsible for collecting, distributing, and settling the invoice for the small business and its customers.
How an Invoice Assignment Agreement Works
An invoice factoring company that offers a small business owner financing collateralized by outstanding receivables requires invoice assignment. After a brief evaluation of the invoice value and potential risk, the factoring company works with the small business to inform the customer their invoice has been assigned.
Before the assignment, the small business would collect the invoice, receive funds, and follow up for any missed payments. After assignment, the factoring company takes on these responsibilities for a fee, acting as an outsourced receivables department, and communicating any important information or updates related to the invoice.
While best practices vary, most factoring companies require small business owners to assign an entire account, meaning all of that customer’s invoices must be submitted through the factoring company. Some invoice factoring companies we reviewed, such as BlueVine, allow small business owners to select specific invoices to factor, a practice referred to as spot factoring.
Why Factoring Companies Notify Customers
Invoice factoring companies are legally required to notify customers and must inform them of the changing nature of the invoicing relationship after an invoice assignment agreement is signed. In this communication, factoring companies also provide information about ways to pay the invoice and can inform customers of their usual policy for collections and late payments.
How Invoice Assignment Affects Small Business Owners
Business owners may worry that having someone contact their customers can affect their relationship with the customer. There is no need to underplay this, and it’s a concern to raise with the factoring providers. However, in industries where factoring is common, such as trucking, manufacturing, and professional services, small business owners will not be negatively impacted by the notification.
Pros and Cons of Invoice Assignment
Assigning invoices is a way for growing companies to finance operations and take on additional customers. It allows small business owners to meet the demands of their clients while maintaining a high level of service. It’s also a major convenience because it eliminates the need for a receivables department within the company.
However, assigning an invoice adds some complexity to a business’s operations. The factoring company will handle direct communication around collections. Customers know that invoices are being factored, which may negatively impact relationships in the short term. Small business owners may get trapped in a cycle of factoring invoices, unable to grow their business without access to this capital.
When you work with an invoice factoring company, you agree to assign customer invoices to the lender, which is then responsible for collecting on the invoice on behalf of your business. As part of the invoice assignment agreement, the factoring company must tell your customers about the invoicing arrangement. Most invoice factoring companies require small business owners to factor every invoice from a particular customer.