If you have decided to work with a factoring company to factor your invoices, there’s a term that you’ll need to become familiar with: Letter of Assignment. This article explains what it is, how it works and its implications for your business.
What is a Letter of Assignment?
The Letter of Assignment, also called a Notice of Assignment, is a letter that the factoring company will send to your customers whose invoices you are factoring. The letter notifies your customers in writing of two things: 1) that their account has been assigned to the factoring company and 2) that future payments should be made payable and sent to the factoring company. The letter will include an address of where payments need to be sent, so the customer can update their payment information.
Most importantly, the Letter of Assignment is a legal document. It explains to your customers that any payments they make directly to you instead of to your factoring company will not fulfill their obligation. If your customer ignores the letter or neglects to update their payment information, the factoring company may hold them responsible for payments that they have sent to the business owner instead of to the factoring company’s address.
Many factoring companies will require your customers to sign and return a copy of the Letter of Assignment to acknowledge that they have received, read and understand the notice. Also, the Letter of Assignment may include legal language stipulating that by continuing to use your services, your customers are in effect agreeing to the notice.
Why a Letter of Assignment is Important to You
The Letter of Assignment ensures that every party in a factoring relationship is fully informed of their rights and responsibilities. It also gives your customer the appropriate address to make payments on their account, allowing your factoring relationship to continue unimpeded.
The Letter of Assignment also offers two crucial protections: 1) a factoring company is able to recover unpaid amounts from your customer, if they fail to pay and 2) a Letter of Assignment is evidence in any legal proceeding that asserts the factoring company’s position and rights to payment.
You will receive a copy of the Letter of Assignment that the factoring company sends to your customers. When you receive your copy, take the time to read it and be sure that you are fully aware of what the terms and conditions mean. If something is unclear, ask your factoring representative. Greater transparency solidifies your factoring relationship, builds trust with your factoring company and protects your interests.
What if I Receive Payment for an Invoice I Didn’t Factor?
You may receive payments that were sent before receipt of the Letter of Assignment or that were released before your customers’ payment system was updated. When you assign your customers’ invoices to your factoring company, you agree that all payments – even those for invoices you did not factor – will be sent to the factoring company. In the Letter of Assignment, there will likely be instructions for sending misdirected payments to the factoring company.
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