Invoice Financing and Factoring

Invoice financing and invoice factoring are financial instruments used by suppliers (not buyers) to access cash against outstanding receivables before customers pay. When a supplier uses factoring, they sell their unpaid invoices to a factoring company (the "factor") for a percentage of the face value -- typically 80 to 90 percent upfront, with the remainder (minus fees) paid when the buyer pays the factor. The factor then owns the debt and expects to collect payment directly from the buyer. For the AP team, this means that payment instructions may change: instead of paying the supplier, the business is directed to pay the factor's bank account.

Invoice financing (also called invoice discounting) is a similar but more confidential arrangement where the supplier borrows against its receivables but the customer relationship is maintained -- the supplier continues to collect payments from its customers and remits them to the financier. In this arrangement, the buyer's AP team may not know that the invoice has been financed, because payment directions remain the same and the factor is invisible to the buyer.

Assignment notices and AP obligations

When a supplier factors a specific invoice, the factor typically sends the buyer an "assignment notice" -- a formal document notifying the buyer that the invoice has been assigned to the factor and that payment should be made to the factor's bank account rather than the supplier's. Receiving an assignment notice creates a legal obligation: if the buyer pays the supplier (the wrong party) after receiving a valid assignment notice, the buyer may be liable to pay again to the factor. The "pay again" risk is the critical AP risk in factoring relationships.

AP teams receiving assignment notices should: verify the notice is genuine (it should come from or be confirmed by the original supplier); update the payment instructions for the specific invoices referenced in the notice; and document the assignment in the AP system so that the payment run generates payment to the factor's account rather than the supplier's default account. The payment instruction change should apply only to the specific invoices listed in the notice -- not to all future invoices from that supplier -- unless the notice specifies a whole-of-relationship assignment.

Assignment notice fraud

Assignment notices are also a vector for fraud: a fraudster who has access to a genuine supplier's invoice can send a fake assignment notice directing payment to a bank account they control, impersonating the factor. This is structurally similar to vendor impersonation fraud (bank account change fraud) but uses the legitimate-sounding mechanism of an assignment notice to make the direction change seem authorised. AP teams should verify assignment notices through the same callback verification process as bank account change requests -- calling the supplier (at their existing contact number) and the purported factor (at a number found independently, not from the notice) to confirm the assignment before changing any payment instructions.