What it means
In ordinary invoice finance, a lender advances a large share of the value of unpaid invoices, often 70% to 90%, and gets repaid when customers pay. In the notified version, the customer is told to pay the lender directly.
In a non-notification arrangement, the customer is not told, and continues paying the borrower as normal. Businesses choose this route to protect customer relationships.
Some owners worry that a customer who learns about the lender may see the business as short of cash or financially fragile, and may question whether to keep buying. Keeping the facility confidential avoids that worry, although the business still has to run its collections carefully and keep its records in good order.
The lender takes on extra risk, because the borrower holds the incoming cash. To manage this, lenders usually require a dedicated collection bank account, regular reporting and audits of the sales ledger, and a fairly strong business track record.
They may also charge more than they would for a notified facility. Non-notification loans are secured on the receivables (money owed by customers) rather than on property, so they can work well for growing firms that do not have much to pledge.
They also scale up automatically as sales rise, since more invoices means more borrowing capacity. The main danger is misuse.
If the borrower spends customer payments instead of passing them on, the lender is exposed and the facility can be pulled immediately. Owners should also check the terms for fees, minimum usage and what happens if invoices are disputed.
In practice
Real-world examples.
Example
A recruitment agency invoices clients $250,000 a month on 60-day terms. It borrows against those invoices confidentially so it can meet payroll, and the clients keep paying the agency as usual without ever hearing from the lender. If the agency invoices grow to $300,000 a month, its borrowing capacity grows with them.
Example
A packaging manufacturer supplies a large retailer that is sensitive about its suppliers' finances. The manufacturer uses a non-notification facility to fund raw materials without risking the relationship. The retailer's buyers never see a lender's name on any remittance or letter.
Example
A digital marketing firm with $120,000 of outstanding invoices draws $90,000 from a confidential facility to pay for a new office. It repays the lender each week from customer receipts into a controlled account, and the lender's monitoring team reconciles the account against the sales ledger monthly.
Formula
Calculation
Amount advanced = Eligible invoices x Advance rate
A wholesaler has $400,000 of unpaid invoices, of which $40,000 are more than 90 days old and not eligible under the lender's rules. Eligible invoices = $400,000 - $40,000 = $360,000. With an advance rate of 80%, amount advanced = $360,000 x 0.80 = $288,000. If the lender charges a service fee of 1.5% of the invoices financed, the fee is $360,000 x 0.015 = $5,400, which is charged on top of interest on the amount drawn. If the average invoice is paid after 60 days and the interest rate is 9% a year, interest on $288,000 for 60 days is $288,000 x 0.09 x 60 / 360 = $4,320, so the total cost for the period is $5,400 + $4,320 = $9,720.Case study
Seen in the real world.
Tidewater Components is a fictional parts maker created to illustrate this idea. It had $600,000 of invoices outstanding and a bank unwilling to extend its overdraft, but its largest customer disliked dealing with finance companies.
The owner arranged a non-notification facility advancing 75% of eligible invoices. Tidewater drew $360,000 against $480,000 of eligible invoices, used the funds to buy steel at a supplier discount, and kept the arrangement private.
Within a year the discount saved more than the extra cost of the finance. The lender, however, insisted on monthly ledger reviews, and the owner learned that the privacy came with extra reporting work.
Watch out
Common mistakes.
- Thinking the debt disappears from view. The loan is still a liability and must be shown properly in the accounts and to auditors.
- Using customer payments for other costs before passing them to the lender. This breaches the agreement and can trigger immediate repayment.
- Ignoring the cost. Confidential facilities usually carry higher fees, so compare the full price against a notified one.
Questions
People also ask.
Does the customer ever find out?
Not under normal use, but if the borrower defaults, the lender may step in and notify customers to collect directly.
Is it the same as factoring?
No. In factoring the lender normally buys the invoices and collects from customers, whereas here the borrower keeps control of collections and the lender simply holds the invoices as security.
Who suits this kind of loan?
Stable, growing businesses with good invoices, reliable record keeping and customers who pay on time.
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