When a factoring company purchases the proceeds of an invoice, it is required for collateral security purposes to inform the account debtor (customer) the assignment has been made. In this case the client has assigned the proceeds (payment) of an invoice to a third party, the factoring company. With proper notification, failure by the account debtor to pay the factor directly results in a “payment over notice claim.”
When a company finishes work for a customer and allows them net terms to make the payment, they are essentially loaning money to the customer, waiting to get paid. The factor is purchasing that loan and the notification process is to protect all parties in the transaction.
Many factors handle the notification process differently. The proper method is for the account debtor to acknowledge a notification memo advising them of the assignment.