Notice of assignment

In invoice factoring, the notice usually identifies the factor, the affected receivables, and the account where payment must be sent. It may be sent by the company, the factor, or both.

The notice protects the payment flow. It also gives the customer a clear record of whom to pay after the receivable has been assigned.

Key takeaways

• The notice changes the customer’s payment instructions.
• Before effective notice, the customer can generally discharge the invoice by paying the assignor.
• After effective notice, paying the assignor generally no longer discharges the obligation.
• The customer may request reasonable proof of the assignment.
• A notice of assignment is common in ordinary factoring and does not prove default.
• Contract restrictions, government receivables, healthcare receivables, and other exceptions require specific review.

What the notice usually includes

A notice may identify:

• The company that issued the invoice
• The factor or assignee
• The invoices or receivables covered
• The effective date
• The new remittance address or account
• Instructions for confirming payment information
• Contact information for questions
• A statement that payment to another party may not satisfy the invoice

The notice should be consistent with the factoring agreement and the customer contract.

Legal effect under UCC § 9-406

Subject to the statute’s exceptions, UCC § 9-406 provides that an account debtor may discharge its obligation by paying the assignor until it receives authenticated notification that the amount due has been assigned and payment is to be made to the assignee.

After effective notification, paying the assignor generally does not discharge the obligation.[1]

This is the practical reason factors control the notice and payment instructions. A customer that sends money to the wrong party after proper notice may still owe the assignee.

Proof of assignment

The customer may ask the assignee for reasonable proof that the assignment occurred. Under UCC § 9-406(c), failure to provide reasonable proof can allow the customer to discharge the obligation by paying the assignor even after receiving notice.[1]

A customer should verify unexpected payment changes using known contact information. Fraudulent payment instructions are a separate operational risk.

Claims and defenses still matter

Assignment does not automatically make a disputed invoice valid.

Under UCC § 9-404, an assignee’s rights are generally subject to the terms of the agreement between the customer and the seller and to certain defenses or claims arising from the transaction.[2]

If the customer has a legitimate dispute, credit, offset, or claim, the notice does not necessarily eliminate it.

Anti-assignment clauses

Commercial contracts sometimes prohibit assignment or require customer consent.

UCC § 9-406(d) generally limits the effectiveness of certain restrictions on assigning accounts, subject to exceptions and applicable state law.[1] Other rules may apply to government contracts, healthcare receivables, personal-service rights, and specific statutory programs.

A clause that may be ineffective against the assignment can still matter to the business relationship. Review the contract and customer process before notice is sent.

Real-world example

A manufacturer factors invoices owed by a regional distributor. The factor sends an authenticated notice directing the distributor to remit future payments to a controlled account.

Before receiving the notice, the distributor could generally satisfy an invoice by paying the manufacturer. After effective notice, the distributor must follow the new instructions to discharge the obligation.

If the distributor questions the assignment, it can request reasonable proof.

Customer relationship considerations

Staffing agencies often worry about customer reaction; the staffing invoice factoring guide covers notice timing, portal rules, and relationship expectations in more detail.

The notice should be clear and routine. Ask the factor:

• Who sends the notice?
• Can the business review the template?
• Who confirms the change with accounts payable?
• How are slow payments handled?
• How are disputes escalated?
• What happens when the facility ends?

A poor communication process can create more friction than the assignment itself.

Common misconception: notice means collections

A notice of assignment can be sent before the invoice is due. It identifies the assignee and payment instructions. It is not the same as a demand letter, default notice, or collection lawsuit.

Sources

1. Uniform Commercial Code § 9-406
2. Uniform Commercial Code § 9-404
3. Uniform Commercial Code § 9-209