For receivables factoring, securing direct payments is critical to the factoring company. After the factor wires an advance of a creditworthy customer invoice, the factoring agreement requires the proceeds of the invoices are to be sent directly to the accounts receivable finance company. The actual payment has been purchased and belongs to the factor. All parties must recognize this and agree to third party payments. Because the factoring agreement allows for deposits in the name of the client, the checks can still be made out in the name of the vendor, but they must be routed to the factors’ lockbox or bank wire instructions.
A notification is sent to each customer account to be financed with the proper payment instructions. Once that notification has been received by the customer (account debtor), no matter what the circumstances, those instructions cannot be legally changed without agreement of the factoring company. In this case, it is a crime to mis-direct payments that are due to the factor. The factoring agreement has in place a penalty fee associated with mis-directed deposits of factored payments. But the greater risk overall is defaulting on the invoice factoring relationship entirely.