In factoring, the credit decision is focused on the accounts receivable of a company because it is the collateral in the transaction. Factoring is governed by the Uniform Commercial Code (UCC), which are the laws that have to do with business transactions. This includes debts owed by one business party to another. All 50 states, Washington D.C., and most provinces in Canada have adopted the UCC.
A key aspect of factoring is the Notice of Assignment. This is a letter issued by the factoring company to their client’s customer (the debtor of the invoices). The specifics of this letter are dictated by the Uniform Commercial Code. It instructs the debtor to remit payment to the factoring company for payment of all invoices that the client issues. When a debtor company has received a Notice of Assignment they are obligated by the UCC law to pay the factor all invoices issued by their client until they have been notified by the factor that the funding relationship has ended.
Payment directly to their client instead of the factor does not remove the obligation under the UCC law to pay the factor. Most factors send the Notice of Assignment to a senior person in the general finance or accounts payable department of their client’s customer and will work with them to set up correct remittance information. In addition to providing access to capital for businesses, factors do a quality or verification of invoices to make sure that the product or service has been delivered acceptably and will be paid as per the contract. This is done very unobtrusively usually by email, online, or even verbally.