The Notification Issue

There are three general structures used in receivables-factoring relationships:

1) the factoring company can buy all of its client’s receivables (and even take over the administration of the client’s entire AR process),

2) the factor can agree to buy all of the receivables of one or more specified customers of the client, or

3) the relationship can be on an invoice-by-invoice basis with the factor purchasing receivables only as and when the client needs the service. This third type of process is called “spot” factoring.

One of the important differences among the different types of factoring relationships is the extent to which the client’s customer must be notified of the sale of its invoice.

In the “full-service” sort of relationship described in #1, above, all of the client’s customers are typically instructed to re-direct all of their payments to a bank lock-box. The terms of the lock-box arrangement are such that customers don’t necessarily have to be told that their invoices are being sold to the factor. For some clients this kind of anonymity or administrative simplicity is important.

In the selected-customer sort of relationship described in #2, above, it is sometimes the case that a lock-box might be used and no specific notification of sale is required. Often, however, the arrangement requires a notification by the client to the customer that the client has established a financing relationship with the factor and that, from a given date, all of that customer’s payments must be sent to the factor or its bank.

The customer will usually be required to acknowledge that it will make the payments to the factor as directed and that it will not change the arrangement without the written consent of the factor.

In the spot factoring business, notification is a much more important and formal
process without which transactions cannot ordinarily be done.

The typical single-invoice Notification will have several elements:

a) the client notifies its customer that the invoice is being sold to the factor,

b) the client directs that payment be made directly to the factor,and

c) the client asks the customer to acknowledge that the goods/services have been provided; that they meet the contract specifications; that payment is due as shown in the invoice; and, that the customer will pay the factor directly.

This is typically known as “full notification”.

This process, obviously, requires much more effort on the part of all of the parties involved. It also gives the client’s customer more power (i.e. the power to refuse)in the process. When establishing a spot-factoring relationship, this is often the place where the process breaks down.

Without proper notification and acknowledgment, though, the factor cannot be sure that the invoice it is buying is valid and that, if it does buy it, it will be paid properly.

In a full-notification relationship, it is in the client’s best interest to discuss the notification requirement with its customer very early in the process. It can save everyone involved a great deal of time and trouble.

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.