When you start factoring, two pieces of paperwork go out that you may never have seen before: a UCC-1 financing statement and a notice of assignment. This chapter explains both, plus what happens when you have another lender or want to end the relationship.
This is general information, not legal advice. State versions of the Uniform Commercial Code can differ. Talk to your attorney about your situation.
Why the UCC applies to factoring
The Uniform Commercial Code (UCC) is a set of model laws that every state has adopted in some form. Article 9 covers secured transactions. It also covers sales of accounts, which is what factoring is.
So even though you are selling invoices, not borrowing, the factor uses the same Article 9 tools a lender would to protect its rights.
The UCC-1 financing statement
A UCC-1 financing statement is a short public filing that tells the world the factor has an interest in certain assets of your business. It is usually filed with the secretary of state where your business is organized.
A UCC-1 lists:
- Your business's legal name and address (the debtor)
- The factor's name and address (the secured party)
- A description of the collateral, such as "all accounts" or "all assets"
Filing the UCC-1 is how the factor perfects its interest. Perfection matters because it sets the factor's place in line against other creditors.
A financing statement is generally effective for five years and can be extended with a continuation filing.
Read the collateral description
Some factors file on accounts only. Others file on all business assets. A broad filing can make it harder to get other financing later, such as an equipment loan. Ask what the factor will file and whether it can be narrowed.
Lien priority and existing lenders
Who gets paid first
When more than one creditor has an interest in the same receivables, priority decides who gets paid first. As a general rule under Article 9, the first to file or perfect has priority. There are exceptions, and certain other liens, such as federal tax liens, follow their own rules.
That is why the factor runs a UCC search before funding. If it finds an earlier filing that covers receivables, it will want that issue resolved.
When you already have a lender
If a bank or other lender already filed on your receivables, you usually have a few paths:
- Payoff and termination. You pay off the existing lender, often using the first factoring advance, and the lender files a termination.
- Release. The lender agrees to release its claim on receivables, keeping its claim on other assets such as equipment.
- Subordination. The lender agrees in writing that the factor comes first on receivables.
- Intercreditor agreement. The lender and the factor sign an agreement dividing which assets each one has first claim to and how they will handle defaults.
Each option requires the existing lender's cooperation. Start the conversation early, because this step often sets the timeline.
Merchant cash advance filings
Many merchant cash advance agreements include a UCC filing on receivables. Factors treat these like any other prior lien. You may need a payoff letter and a termination before funding.
The notice of assignment
A notice of assignment is a letter to your customer. It says you have sold or assigned the invoice and tells the customer to pay the factor going forward.
Notices usually go out when your account is set up, for each customer you plan to factor. Your invoices then carry the factor's remit-to address.
Why the notice matters: UCC 9-406
Under UCC § 9-406, once your customer receives a proper notice of assignment, it can discharge its debt only by paying the factor. If the customer pays you after notice, that payment may not count. The customer could be asked to pay again.
Before notice, the customer can pay you and be discharged.
A few points to know:
- The notice must reasonably identify the rights assigned.
- The customer can ask for reasonable proof that the assignment was made.
- Section 9-406 also limits many contract clauses that try to forbid assigning a right to payment. Government contracts and some other payers follow separate rules.
This is the legal backbone of notification factoring. It is why factors care about every customer receiving the notice.
Leaving a factor: the UCC-3 termination
When you end a factoring relationship, the factor's UCC-1 does not disappear on its own. You need a UCC-3 termination statement filed to clear it from the record.
Under UCC § 9-513, once nothing more is owed and the factor has no further commitment to buy or advance, you can send an authenticated demand for termination. The secured party must then file or send a termination within the time the statute sets.
Steps when you leave:
- Give written notice under your contract's termination clause.
- Ask for a payoff or final statement showing what, if anything, you still owe.
- Settle any open invoices, reserves and fees.
- Ask the factor to file a UCC-3 termination and to send letters to your customers releasing the notice of assignment.
- Run your own UCC search afterward to confirm the filing is terminated.
Customers should get written instructions to start paying you, or your new factor, again. Until then, they may keep paying the old factor.
Frequently asked questions
Will a UCC-1 hurt my credit?
A UCC-1 is a public notice, not a judgment or default. Other lenders will see it and factor it into their decisions. A broad "all assets" filing can limit other financing until it is terminated.
Can I have two factors at once?
Usually not on the same receivables. The first factor's filing and contract will typically claim them. Some businesses use separate funders for different types of assets, which requires clear agreements between them.
What if my customer ignores the notice and pays me?
Your agreement will almost always require you to forward the payment to the factor quickly. Under UCC § 9-406, the customer's payment to you after notice may not discharge its debt to the factor.