An assignment is the transfer of a legal right from one party (the assignor) to another (the assignee). In factoring, the seller assigns its right to receive payment on invoices to the factor.
How it works in factoring
The factoring agreement contains the assignment language. Each time the seller submits invoices, it confirms that those receivables are assigned to the factor, often through a signed schedule of accounts. The factor becomes entitled to the payments.
Several rules shape how assignment works in practice:
- Notice to the customer: Under UCC Article 9, a customer can keep paying the seller until it receives proper notice of the assignment. After that, it must pay the factor.
- Anti-assignment clauses: Article 9 generally makes contract terms that prohibit or restrict assigning accounts ineffective, so most commercial customers cannot block the assignment just by contract.
- Customer defenses: The factor takes the receivable subject to most defenses the customer had against the seller, such as a quality dispute.
- Exceptions: Federal contract payments require compliance with the Assignment of Claims Act, and Medicare and Medicaid payments are subject to anti-assignment rules that restrict paying anyone other than the provider.
Why it matters
Assignment is what makes factoring a purchase of an asset rather than an unsecured loan. If an assignment is defective, the factor may not be able to collect, and the seller may end up in breach of its warranties.