Disclosed factoring is a form of accounts receivable financing in which the business’s customers (debtors) are formally notified that their invoices have been assigned to a factoring company. This notification, known as a Notice of Assignment (NOA), informs the customer that payment should be made directly to the factor rather than to the original seller. Disclosed factoring is the default structure for most factoring arrangements and provides the factor with direct access to the payment stream, reducing collection risk and simplifying the cash flow process.
Disclosed factoring contrasts with confidential (non-notification) factoring, where customers are not informed of the factoring arrangement and continue to pay the business directly. The choice between disclosed and confidential factoring has significant implications for customer relationships, collection efficiency, and cost. Understanding these differences is essential for businesses evaluating receivables finance options.
How It Works
Step 1: The business sells goods or services and generates an invoice.
Step 2: The business assigns the invoice to the factoring company.
Step 3: The factor issues a Notice of Assignment (NOA) to the customer, informing them that the invoice has been assigned and that payment should be directed to the factor’s designated account.
Step 4: The factor advances a percentage of the invoice value to the business (in advance factoring) or commits to paying at the maturity date (in maturity factoring).
Step 5: The customer pays the factor directly on the due date.
Step 6: The factor remits the remaining balance to the business, minus the factoring fee.
The Notice of Assignment is the defining feature of disclosed factoring. It serves as legal notice that the receivable has been transferred and directs the customer to redirect payment. This protects the factor against the risk of the customer paying the original seller (who might then fail to forward the funds).
Disclosed vs. Confidential Factoring
| Disclosed Factoring | Confidential Factoring |
| Customer is notified via Notice of Assignment | Customer is not notified; unaware of the factoring arrangement |
| Customer pays the factor directly | Customer pays the business, which remits to the factor |
| Factor has direct control over collections | Business retains collections responsibility |
| Lower risk of double financing or misdirected payments | Higher risk, factor must trust the business to remit payments |
| Customer aware of third-party involvement | Customer relationship fully preserved |
| Generally lower fees due to reduced factor risk | Generally higher fees due to increased factor risk |
Pros of Disclosed Factoring
Lower cost: Because the factor has direct access to the payment stream (reducing collection and fraud risk), disclosed factoring typically carries lower fees than confidential arrangements.
Simpler collections: The customer pays the factor directly, eliminating the risk of the business misdirecting or commingling collected funds.
Wider availability: Most factoring companies offer disclosed factoring as their standard product. Confidential factoring is less widely available and often requires higher minimum volumes.
Fraud prevention: The NOA prevents double financing, where the same invoice is pledged to multiple funders, because the customer is notified of the assignment.
Cons of Disclosed Factoring
Customer perception: Some customers may view the involvement of a factoring company negatively, interpreting it as a sign of the seller’s financial difficulty.
Relationship impact: Introducing a third party into the payment process changes the customer experience. The factor’s communication style and professionalism directly affect the customer relationship.
Limited control: Once the NOA is issued, the factor manages customer payment communication. The business loses direct control over the collections process.
Costs and Fees
According to InvoiceInterchange, disclosed factoring costs typically include: a discount fee of 1.5% to 5% (the primary cost, based on invoice value and duration), a service fee of 0.5% to 2.5% (covering administration, credit assessment, and collections management), and a factoring fee of 1% to 3% (which may be rolled into the discount fee or charged separately depending on the provider). The total all-in cost depends on volume, customer credit quality, and the specific provider’s fee structure.
Disclosed Factoring vs. Supply Chain Finance
Disclosed factoring notifies the business’s customers that a third party is involved in the payment process. Supply chain finance through Zenith Group Advisors operates on the buyer’s side and requires no notification to suppliers that a third-party funder is involved. Suppliers simply receive payment, their normal commercial relationships are preserved without the added complexity of a Notice of Assignment.
For businesses concerned about customer perception or relationship impact, Zenith’s AP financing provides a structurally different approach that preserves commercial confidentiality. Learn more about the benefits of SCF.
Frequently Asked Questions
Can I switch from disclosed to confidential factoring?
Some factors offer both options, and it may be possible to transition. However, confidential factoring typically requires stronger internal credit controls and higher minimum volumes, and the fees may increase.
Does the customer have to accept the Notice of Assignment?
The NOA is typically a notification, not a request for consent. The customer is informed that the receivable has been assigned and that payment should be directed to the factor. In most jurisdictions, the assignment is valid regardless of the customer’s acceptance.
Is disclosed factoring available for international invoices?
Yes, though cross-border disclosed factoring involves additional legal considerations regarding the enforceability of the assignment and the NOA in the customer’s jurisdiction.
IMPORTANT NOTE: Disclosed factoring is a receivables-side product available to suppliers and is not offered by Zenith Group Advisors. Zenith works exclusively with buyers through an insurance-backed, unsecured accounts payable financing program.
Explore how Zenith’s supply chain finance preserves commercial relationships without customer notification SCF Benefits or Contact Us.
