Notice of Assignment
A formal written notification sent to an account debtor informing them that their receivable has been assigned or sold to a third party, redirecting payment to the assignee.
Definition
A notice of assignment is a formal written document sent to an account debtor (the customer who owes payment on an invoice) informing them that the right to collect on that receivable has been transferred to a third party. The third party is typically a factor or an asset-based lender. Once the debtor receives this notice, they are legally obligated to redirect payment to the assignee rather than the original seller.
Under UCC Article 9, proper notification is what converts an assignment into an enforceable obligation against the account debtor. Without it, the debtor can pay the original seller in good faith and be discharged from the obligation, leaving the assignee with a claim only against the seller.
Why It Matters
The notice of assignment is not a formality; it is a legal mechanism that protects the financial interests of the assignee and establishes the debtor's obligation to pay the correct party. For businesses using invoice factoring or asset-based lending, the notice serves three critical functions:
- Payment redirection: It legally obligates the debtor to send payment directly to the factor or lender, reducing the risk that funds are diverted or commingled with the seller's operating accounts.
- Priority protection: A properly delivered notice, combined with a UCC-1 filing, establishes the assignee's priority interest in the receivable against competing creditors.
- Fraud deterrence: The notice makes it significantly harder for a seller to factor the same invoice with multiple parties, because the debtor is on record as knowing who holds the claim.
In non-recourse factoring arrangements, the notice is especially important because the factor bears the credit risk on the debtor. The factor needs direct payment control to manage that exposure effectively.
Common Mistakes
Assuming notification is optional. Some businesses treat the notice as a courtesy rather than a legal requirement. Under UCC 9-406, the debtor is not obligated to pay the assignee until they receive proper written notice. Skipping it or delaying it creates a window where the debtor can pay the seller and be legally discharged.
Using vague or incomplete notices. A valid notice must clearly identify the assigned receivable (invoice number, amount, date), name the assignee, and provide payment instructions. Generic letters that reference "certain invoices" without specifics may not satisfy legal requirements and can confuse debtors into continued payment to the seller.
Failing to track debtor acknowledgment. Sending the notice is one step; confirming the debtor received and understood it is another. Best practice is to require written acknowledgment or use delivery methods that provide proof of receipt (certified mail, email with read receipt). Factors typically build acknowledgment tracking into their onboarding process.
Confusing notification with consent. The debtor does not need to approve or consent to the assignment. Most commercial contracts include anti-assignment clauses, but UCC 9-406 generally overrides these for receivables. The notice informs the debtor; it does not request their permission.
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Get Financing OptionsFrequently Asked Questions
Does the account debtor have to agree to the assignment?
No. Under UCC Article 9, an assignment of accounts receivable is effective between the seller and the assignee without the debtor's consent. Even if the original contract between the seller and debtor contains an anti-assignment clause, UCC 9-406(d) generally renders such restrictions unenforceable for the assignment of payment rights. The notice of assignment informs the debtor of the new payment destination; it does not seek their approval. However, some government contracts and specific industries may have enforceable restrictions, so legal review is advisable for non-standard receivables.
What happens if the debtor pays the original seller after receiving a notice of assignment?
Once the debtor has received a proper notice of assignment, payment to the original seller does not discharge the debtor's obligation. The debtor remains liable to the assignee (the factor or lender) for the full invoice amount. In practice, this means the factor can demand payment directly from the debtor, and the debtor may end up paying twice if they cannot recover funds from the seller. This is why debtors typically update their payment records promptly after receiving a valid notice. For the assignee, this rule is one of the core protections that makes invoice factoring and asset-based lending commercially viable.
Is a notice of assignment the same as a UCC-1 filing?
No, they serve different purposes. A UCC-1 financing statement is filed with the state to establish the assignee's priority interest in the collateral against other creditors. It is a public record that puts third parties on notice. A notice of assignment, by contrast, is sent directly to the account debtor to redirect payment. Both are typically required in a factoring or ABL arrangement: the UCC-1 protects priority, and the notice of assignment controls cash flow. Neither substitutes for the other.
Do all factoring companies require a notice of assignment?
Most do, but the approach varies. In notification factoring (the most common structure), the debtor receives a formal notice and pays the factor directly. In non-notification factoring, the debtor is not informed and continues paying the seller, who then remits funds to the factor. Non-notification arrangements are less common because they carry higher risk for the factor - the seller controls cash flow, increasing the risk of diversion. Spot factoring transactions, which involve one-time or selective invoice purchases, also typically require notification. Recourse factoring arrangements may offer more flexibility on notification timing depending on the factor's risk appetite.
What should a notice of assignment include?
A properly drafted notice of assignment should include: (1) the name and address of the assignor (original seller), (2) the name and address of the assignee (factor or lender), (3) a clear statement that the specified receivables have been assigned, (4) identification of the assigned invoices by number, date, and amount, (5) new payment instructions including remittance address or bank account details, and (6) a statement that the debtor is obligated to pay the assignee going forward. Many factors also include a request for written acknowledgment from the debtor. The notice should be delivered via a method that provides proof of receipt, such as certified mail or email with delivery confirmation.
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