When factoring invoices for working capital the entire process revolves around the account debtor or “customer†making their payments directly to the factoring company. The way this usually works is; first you submit info about a potential customer to the factor who finds credit history to determine whether the account is able to be financed. If the customers’ credit history is deemed creditworthy then it is safe to assume that the invoice will be factored.
Next, once the sale has been completed – the product or service has been delivered, the factoring company must notify the customer that you have assigned the proceeds of the invoice to a third party (the factor.) This is a legal obligation when assigning payments due to you, but payable to a third party. From a legal standpoint there is no opaqueness to invoice factoring. Actually the factoring agreement is a Purchase and Sale Agreement whereby the client is selling the invoice to the factor.
Finally the factor contacts the customer to verify that the invoice represents the delivered services and to insure that the ‘remit to’ address has been correctly entered into their system as going directly to the factor. There are no situations in factoring where the funded client receives payments from a customer and passes them along to the factoring company.
Typically every payment from a customer where invoices are being funded must go to the factor. The accounts payable department of the customer will become confused which payment goes where. So once an account has been “turned on,†all payments from that customer go directly to the factoring company, although not every invoice must be factored. Any payment of a non-factored invoice is sent on to you and no funding fees are taken out.