Notification is the process of notifying a customer of the factor’s assignment. Where a customer would normally pay the bill (invoice) to the cleint or the provider of goods and services, once noticed, that customers obligation is to pay the factor…and no other. From a strictly legal standpoint, the customer circumvents the factor and pays the client, the bill is NOT legally paid and if the factor is defrauded and does not receive payment, the customer may be forced to pay for the goods or services a second time.
Once invoices are purchased, factors monitor their investment and turn to collections. In fact, at this point factors are simply “waiters”, but not the kind you might find in your favorite restaurant. Factors wait for THEIR money on THEIR invoices. The use of “their” is emphasized here because as you know, factoring is a purchase and sale transaction and never a loan. Factors own the invoices.
Once purchased, the invoice is assigned and the factor is the legal owner of the invoice and has all rights to the invoice payment. In fact, if a factor’s client receives a payment on an assigned invoice and doesn’t immediately remit that payment to the factor, it can be construed as civil theft with varying legal ramifications and penalties, depending on the state of jurisdiction. In the industry this is called a misdirected payment or more commonly, collection.
To help avoid such problems of misdirected payments, factors will notify a client’s customers of the invoice purchase, assignment of rights, and the existing financing arrangement in a process called notification of assignment. The rules regarding such notification are set forth in Article 9 of the UCC and basically state that once legally noticed, the account debtor’s payment obligation is now to the noticer (factor or lender) and no longer to the borrower (client).