A misdirected payment is a payment on a factored invoice that lands with the seller instead of the factor. It might be a mailed check, an ACH deposit or a card payment that went to the old remittance address.
How it works in factoring
Once an invoice is sold, the payment belongs to the factor. Factoring agreements almost always say the seller holds any such payment in trust for the factor and must turn it over within a short window, often in its original form, such as an endorsed check.
Misdirected payments happen for ordinary reasons:
- The customer's payables system was not updated after the notice of assignment
- A new staff member uses an old vendor record
- The customer pays several invoices at once, some factored and some not
Repeated or unreported misdirected payments are treated seriously. Agreements may allow the factor to charge a fee for each one, to require a deposit account control agreement, or to declare a default. Keeping a payment intended for the factor can also create legal exposure beyond the contract.
From the customer's side, a payment made to the seller after a valid notice of assignment may not discharge the debt under the Uniform Commercial Code, so the customer may be asked to pay again.
What to check
- How quickly misdirected funds must be forwarded under your agreement
- Whether a fee or penalty applies
- Whom to contact at the factor when a payment arrives
- Whether a customer's vendor record needs to be corrected again