Nonnotification Loan

Key Takeaways

• Non-notification loans are securitized by a company's accounts receivable.
• These loans provide immediate cash flow for businesses by selling outstanding invoices.
• Borrowing companies maintain customer relationships while factors handle invoice collections.
• Factoring companies charge fees based on the risk of customer payment defaults.
• Non-notification loans have expanded to various industries due to lower revenue requirements.
• Get personalized, AI-powered answers built on 27+ years of trusted expertise.

What Is a Non-Notification Loan?

Non-notification loans are a specific type of financing option beneficial for businesses that need immediate access to cash, with accounts receivable as collateral. A business sells its AR portfolio to another party for a percentage of their value. Non-notification loans are a type of invoice factoring, which is a common way for business-to-business (B2B) corporations to obtain financing. The loan helps business-to-business (B2B) corporations maintain cash flow immediately.

Non-notification loans differ from traditional factoring because borrowing companies maintain customer relationships.

How Non-Notification Loans Work

Factoring is a method used by companies to immediately obtain capital and financing to satisfy their short-term needs without the need to go to a traditional lender, such as a bank or financial institution. The amount they receive is completely based on the value of a company's accounts receivables, which represent the total amount of money owed to a company by its customers.

Non-notification loans are a form of factoring. They are also commonly referred to as accounts receivable financing. These types of loans generally involve three different parties. These entities include:

the borrowing company

the company that purchases the portfolio (known as the factor)

the original company's customers1

The borrowing company is given cash by the lender. Unlike other forms of factoring, the borrowing company retains the relationship with its customers. This means it continues to collect from its debtors. The factor, in turn, receives a portion of the money paid by the borrower's customers. The lender also receives a fee to compensate them for any default risk that arises when customers don't pay their invoices. The amount of the fee depends on the degree of default—the greater the risk of default, the larger the fee. A lower chance of default results in a lower fee paid to the factor.2

Non-notification loans are most common in B2B settings because factoring companies only give loans on invoices issued to corporate clients. Most factoring companies require that borrowers demonstrate minimum annual revenues, sign an annual contract, and make monthly minimum payments.

Fast Fact

Commercial banks and finance companies may find non-notification loans attractive because they don't assume credit risk on the receivables sold or assigned.

Factors to Consider with Non-Notification Loans

Commercial banks and finance companies are the primary originators of non-notification loans. But the internet allows modern factoring companies to offer a broader range of non-notification loans to more businesses, with lower revenue requirements and less stringent restrictions. Non-notification loans have also been adapted to specific industries, including construction, real estate, the medical industry, and trucking.

The Evolution of Non-Notification Loans

English common law traditionally held that non-notification loans were invalid. This remained true in the United States until the mid-20th century. By then, factoring became a prevalent form of financing for the textile industry, a rapidly growing business whose financing needs may have stressed smaller banks in the U.S. banking system. By 1949, most U.S. states legalized non-notification loans.

Banks and other finance companies began providing the service to commercial clients in the early 20th century because the Federal Reserve would not buy notes backed by AR. Non-notification loans can be attractive for a financing company because they do not assume any credit risk on the receivables sold or assigned.