Any legitimate factoring company will require verification of invoices submitted for financing. Exactly as it sounds, the factor is verifying the invoice really is owed by an actual customer. Is this piece of paper real?
On the customer side, it helps to understand and explain what the verification and notification are supposed to accomplish. Too often both the factoring client and their customer being unfamiliar with invoice factoring assume some sort of added liability is being foisted on the customer. That is not the intention of the verification.
The verification is meant to merely insure that all parties are on the same page. What is the exact dollar amount owed by the customer to the client and are there any outstanding credits that will be deducted from the payment. It’s fine if there are credits from another order as long as the factor has acknowledgement of them prior to making the advance to the client on the invoice. The factoring company never wants to learn about credits taken when they receive the check payment. That is actually what the reserve account is for, to protect in case of surprises.
The notification provides instructions telling the customer, the client has assigned the proceeds of an outstanding invoice to the factor and the customer should make all payments directly to the factor.
Notification does not mean the customer has some sort of extra responsibility for the payment necessarily. Trying to sue a customer to get repaid during normal business conditions would take too long, at least a year. The notification protects the factor from a client calling the customer one day and telling them “hey don’t worry about sending the check to the factor, send it to me instead.” In factoring this is called “mis-directed payment.” You will find there is mention of this in a Factoring Agreement.
What this means is – the customer was given instructions in writing to make all payments directly to the factor no matter what. When asked to sign, they are acknowledging the payment instructions. They are not having to guarantee payment from a practical sense, it would take too long to go after them and factors can’t exist waiting a year for collections. Besides the factor might be looking for the client to sue the customer for non-payment because they provided the work.
But, by acknowledging payment instructions – if the customer pays the client instead of the factoring company, the factor will most certainly go after the customer because they circumvented written agreed to instructions. And that is a slam dunk proceeding in court.
Verification provides clarification of the amount owed, notification instructs where the payment should go.