What is Non-Notification Factoring and How Does it Work?

Last Updated January 11, 2024

Non-notification factoring is used by businesses to improve accounts receivable cash flow as an alternative to financing methods such as traditional factoring, taking out a loan, or applying for a line of credit.

The ultimate goal of non-notification factoring is the same as that of traditional invoice factoring – to increase working capital. However, a couple of key differences, particularly in the form of communication between parties, distinguishes non-notification factoring from traditional invoice factoring.

What is Non-Notification Factoring?

Non-notification factoring, also known as confidential invoice factoring, is like normal factoring, occurring when a business’s outstanding customer invoices are sold to a factoring company in exchange for a cash advance (typically 80-90% of the unpaid invoice value).

The main difference lies in how communication works between the factoring company and the client’s customers. In a standard factoring agreement, the factoring company deals directly with the client’s customers throughout the A/R collections process. This involves a notice of assignment where the factor notifies the client’s customer that going forward, they will need to remit all payments to the factor. 

In a non-notification agreement, the client’s customers remain unaware of the factoring company’s involvement. Rather than sending a notice of assignment to your clients, the factoring company would communicate with your customers as though it is an extension of your business. For example, the factor may use your business’s branded email, rather than their own, and customer payments would be made to a PO box rather than directly to the factoring company. 

Qualifying for a Non-Notification Factor

The types of companies that apply for non-notification factoring differ from those that use traditional invoice factoring. This is attributed to non-notification factoring demanding a different, and stricter, qualification process, whereas far more leeway is given by companies that offer conventional factoring. This is what makes factoring a popular method to increase cash flow for small business owners or new business owners. 

Strong credit is not the only aspect of a business that non-notification factors look for when determining qualification. A business also has to be invoicing far higher amounts than businesses that opt for traditional factoring.

Criteria for non-notification factoring may include:

• High credit
• High customer credit
• Minimal risk of bankruptcy
• History of reliable A/R figures (> 1 year)
• Business in operation for 2+ years
• Invoicing more than $250,000 per month

Notification Factoring (Standard) vs. Non-Notification Factoring

	Standard Factoring	Non-Notification Factoring
Easy Approval Process	✔️	❌
Qualification Dependent on Your Credit	❌	✔️
Qualification Dependent on Your Customers’ Credit	✔️	✔️
Includes Cash Advance to Improve Cash Flow	✔️	✔️
Customer is Aware of Factoring Company’s Involvement	✔️	❌
Customer Sends Invoice Payment Directly to Factoring Company	✔️	❌
Good for Small Businesses and New Businesses	✔️	❌

Advantages of Non-Notification Factoring

While non-notification factoring may not be the best financing method for a small business, it can be beneficial for more established businesses that struggle keep working capital on-hand but have high sales.

Unchanged or Improved Customer Experience

Traditional factoring requires a notice of assignment to be sent to your customers. While usually not the case, some customers may become wary of dealing with a third-party, resulting in a difficult transition process.

Non-notification factoring reduces the friction felt by your customers as it removes need for your customers to communicate with the factoring company. Because of this lack of contact, the customer experience should remain unblemished. In fact, it could actually improve due to an overall more efficient A/R management process thanks to a having the factoring company dedicated to invoice payment collection.

Increased Cash Flow

While there are differences between non-notification factoring and traditional factoring, the intent behind the two financial methods remains the same: to increase cash flow.

One study showed that cash flow issues, poor cash flow management, and poor understanding of cash flow are the leading factors for why small businesses fail.

Allowing a factor – or non-notification factor – to not only help boost your cash flow but help alleviate pressures related to your A/R management process, enables you, as a business owner, to shift your focus toward more relevant day-to-day tasks.

Potential for a Contractual Workaround

Certain businesses have contracts with customers that prohibit the use of a factoring company. Since the contract may state that there is to be no communication between the customer and a factoring company, non-notification factoring – which does not involve that line of communication – can be a workaround.

In this case, it’s important that the business shares the contract with the factor beforehand for careful review, ensuring that contractual obligations are being followed.

Disadvantages of Non-Notification Factoring

Stringent Qualification Requirements

To qualify for non-notification factoring, you must have more than just a high credit score. As noted above, you must provide evidence of owning a strong and stable business for multiple years, and you must be willing to factor your entire sales ledger.

Additionally, non-notification factoring is restricted to businesses in the service or manufacturing industries, whereas a wider net of industries can use standard invoice factoring.

Increased Risk

Because businesses tend to use non-notification factoring for its confidentiality to avoid breaching a contract, there is more risk involved for you as the business owner. If a breach in contract occurs, the factoring company has the right to notify your client.

This increased risk is also evidenced by the far larger monthly invoicing rates that non-notification factors require of their businesses than standard factors require for conventional factoring (which can be as little as $20,000 per month).

Availability

Given the rigorous underwriting process that this financing method entails, it’s not easy to find a company that offers non-notification factoring. This makes it difficult for companies that qualify for non-notification factoring to find the right factor for them. 

There is also therefore less competition in the non-notification market, which can result in higher prices than standard factoring due to the increased risk.

Choosing the Right Factoring Method for Your Business

It’s important to do your research on what factoring company, or factoring method, is right for you when choosing how to finance your business and improve cash flow.

At altLINE, we have 88 years of experience helping small business owners manage and improve their A/R cash flow through invoice factoring. If you think invoice factoring might improve your working capital, call one of our representatives at +1 (205) 607-0811 or fill out our factoring quote form.