An account debtor is the person or business that owes money on a receivable. In plain terms, it is your customer, the one who received the goods or services and is expected to pay the invoice.
How it works in factoring
Factoring involves three parties: the seller (the factor's client), the factor, and the account debtor. Because the factor is buying the right to be paid, the account debtor's financial strength often matters more to the factor than the seller's.
Before buying invoices, a factor usually:
- Checks the account debtor's payment history and commercial credit information
- Sets a credit limit for how much it will buy on that customer
- Verifies that specific invoices are valid and undisputed
Once the account debtor receives a proper notice of assignment, the Uniform Commercial Code generally means it can only discharge the debt by paying the factor. Paying the seller after notice does not necessarily satisfy the obligation, which is why remittance instructions matter so much.
The UCC also limits contract terms that try to forbid assigning receivables, so an account debtor usually cannot block a sale of accounts simply through an anti-assignment clause. Government and Medicare payments follow separate federal rules.
Why it matters
Your customer list largely determines what a factor will offer. Strong, established account debtors can support higher advance rates and credit limits, while weak or concentrated customer bases can narrow what is available.