Notification factoring is the most common form of factoring. The seller's customers are informed that their invoices have been sold or assigned to a factor, and they are told to send payment directly to the factor.
How it works in factoring
At the start of the relationship, the factor or seller sends each customer a notice of assignment. It identifies the factor, states that payments must go to a new address or account, and often asks the customer to acknowledge it. Future invoices carry the factor's remit-to information.
The legal effect is significant. Under the Uniform Commercial Code, once a customer has received an effective notice, it can generally discharge its debt only by paying the assignee. If it pays the seller anyway, it may be required to pay again.
Notification also lets the factor:
- Verify invoices directly with the customer
- Track payments and follow up on late accounts
- Reduce the risk of diverted payments
What to check
- Who sends the notice, and whether you can preview its wording
- Whether the customer is asked to sign an acknowledgment
- How payments that still reach you will be handled
- How customers will be told when the relationship ends
Some businesses worry that customers will view factoring as a warning sign. In practice, notification is routine in industries such as trucking, staffing and manufacturing, and clear communication usually prevents concerns.