Myth buster: If I factor, I will lose customers
Notification is the means by which the debtor is informed about the factoring arrangement. There are many subtle ways that debtors can be notified, and an experienced factor will adjust the process depending on the industry and the type and quality of the paperwork. Regardless, it is important to contact key customers ahead of time and let them know about any remittance changes.
Non-notification is on one end of the spectrum, in which case the debtor is informed of a simple new remittance to a specific P.O. Box without mention of a third party. Conversely, full-notification will include a professionally written letter from the client stating something like:
“In order to accommodate rapid growth and maintain the high quality level of our service, we have retained the professional services of (factor’s name), a highly respected source for accounts receivable management and funding. As part of their service, they are providing us with a centralized billing and accounts receivable system. Therefore, we request your cooperation in remitting payments on all open and subsequent invoices to…”
Either way, it is important to employ a factor that respects and understands that a professional relationship between all parties is vital.
Which Type is Best for You?
While on the surface it may appear that non-notification factoring is preferable to full-notification factoring, this isn’t necessarily the case.
You should be careful to only do business with reputable, well-financed and experienced factoring companies. Such factors are skilled at dealing with debtors, and they have a vested interest in building cooperative, long-term relationships with their clients and debtors, and in keeping debtors happy and not upsetting them.
A good factor will work with you and advise you on how to go about instituting the proper notification process. The key is to explain the arrangement clearly to debtors in advance so there are no surprises later. By ensuring good communication between all three parties involved—your company, the factor and the debtor—you will go a long way toward busting the common myth that factoring will result in lost customers.
Tom Klausen is the senior vice president of First Vancouver Finance in Vancouver, BC. Klausen has had extensive experience in providing alternative financing solutions to small business owners, and also provides business management consulting services to both traditional and non-traditional lenders throughout North America. He can be contacted at (604) 988-1490 or via email at TKlausen@fvf.ca or visit http://www.fvf.ca/.