assignment or receivables

The Difference Between Assignment of Receivables & Factoring of Receivables

You can raise cash fast by assigning your business accounts receivables or factoring your receivables. Assigning and factoring accounts receivables are popular because they provide off-balance sheet financing. The transaction normally does not appear in your financial statements and your customers may never know their accounts were assigned or factored. However, the differences between assigning and factoring receivables can impact your future cash flows and profits.

How Receivables Assignment Works

Assigning your accounts receivables means that you use them as collateral for a secured loan. The financial institution, such as a bank or loan company, analyzes the accounts receivable aging report. For each invoice that qualifies, you will likely receive 70 to 90 percent of the outstanding balance in cash, according to All Business. Depending on the lender, you may have to assign all your receivables or specific receivables to secure the loan. Once you have repaid the loan, you can use the accounts as collateral for a new loan.

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How to decrease bad debt expenses to increase income, what does "paid on account" in accounting mean, what is a financing receivable, what do liquidity ratios measure, what are some examples of installment & revolving accounts, assignment strengths and weaknesses.

Using your receivables as collateral lets you retain ownership of the accounts as long as you make your payments on time, says Accounting Coach. Since the lender deals directly with you, your customers never know that you have borrowed against their outstanding accounts. However, lenders charge high fees and interest on an assignment of accounts receivable loan. A loan made with recourse means that you still are responsible for repaying the loan if your customer defaults on their payments. You will lose ownership of your accounts if you do not repay the loan per the agreement terms.

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How Factoring Receivables Works

When you factor your accounts receivable, you sell them to a financial institution or a company that specializes in purchasing accounts receivables. The factor analyzes your accounts receivable aging report to see which accounts meet their purchase criteria. Some factors will not purchase receivables that are delinquent 45 days or longer. Factors pay anywhere from 65 percent to 90 percent of an invoice's value. Once you factor an account, the factor takes ownership of the invoices.

Factoring Strengths and Weaknesses

Factoring your accounts receivables gives you instant cash and puts the burden of collecting payment from slow or non-paying customers on the factor. If you sell the accounts without recourse, the factor cannot look to you for payment should your former customers default on the payments. On the other hand, factoring your receivables could result in your losing customers if they assume you sold their accounts because of financial problems. In addition, factoring receivables is expensive. Factors charge high fees and may retain recourse rights while paying you a fraction of your receivables' full value.

• All Business: The Difference Between Factoring and Accounts Receivable Financing

Receivables Finance And The Assignment Of Receivables

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A receivable represents money that is owed to a company and is expected to be paid in the future. Receivables finance, also known as accounts receivable financing, is a form of asset-based financing where a company leverages its outstanding receivables as collateral to secure short-term loans and obtain financing.

In case of default, the lender has a right to collect associated receivables from the company’s debtors. In brief, it is the process by which a company raises cash against its own book’s debts.

The company actually receives an amount equal to a reduced value of the pledged receivables, the age of the receivables impacting the amount of financing received. The company can get up to 90% of the amount of its receivables advanced.

This form of financing assists companies in unlocking funds that would otherwise remain tied up in accounts receivable, providing them with access to capital that is not immediately realised from outstanding debts.

FIG. 1: Accounts receivable financing operates by leveraging a company’s receivables to obtain financing.  Source: https://fhcadvisory.com/images/account-receivable-financing.jpg

Restrictions on the assignment of receivables – New legislation

Invoice  discounting  products under which a company assigns its receivables have been used by small and medium enterprises (SMEs) to raise capital. However, such products depend on the related receivables to be assignable at first.

Businesses have faced provisions that ban or restrict the assignment of receivables in commercial contracts by imposing a condition or other restrictions, which prevents them from being able to use their receivables to raise funds.

In 2015, the UK Government enacted the Small Business, Enterprise and Employment Act (SBEEA) by which raising finance on receivables is facilitated. Pursuant to this Act, regulations can be made to invalidate restrictions on the assignment of receivables in certain types of contract.

In other words, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses is unenforceable. Especially, in its section 1(1), the Act provides that the authorised authority can, by regulations “make provision for the purpose of securing that any non-assignment of receivables term of a relevant contract:

• has no effect;
• has no effect in relation to persons of a prescribed description;
• has effect in relation to persons of a prescribed description only for such purposes as may be prescribed.”

The underlying aim is to enable SMEs to use their receivables as financing to raise capital, through the possibility of assigning such receivables to another entity.

The aforementioned regulations, which allow invalidations of such restrictions on the assignment of receivables, are contained in the Business Contract Terms (Assignment of Receivables) Regulations 2018, which will apply to any term in a contract entered into force on or after 31 December 2018.

By virtue of its section 2(1) “Subject to regulations 3 and 4, a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.”

Such regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are several exclusions to this rule.

In section 3, an exception exists where the supplier is a large enterprise or a special purpose vehicle (SPV). In section 4, there are listed exclusions for various contracts such as “for, or entered into in connection with, prescribed financial services”, contracts “where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession” or contracts “where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom”. Also, specific exclusions relate to contracts in energy, land, share purchase and business purchase.

Effects of the 2018 Regulations

As mentioned above, any contract terms that prevent, set conditions for, or place restrictions on transferring a receivable are considered invalid and cannot be legally enforced.

In light of this, the assignment of the right to be paid under a contract for the supply of goods (receivables) cannot be restricted or prohibited. However, parties are not prevented from restricting other contracts rights.

Non-assignment clauses can have varying forms. Such clauses are covered by the regulations when terms prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.

Overall, these legislations have had an important impact for businesses involved in the financing of receivables, by facilitating such processes for SMEs.

Digital platforms and fintech solutions: The assignment of receivables has been significantly impacted by the digitisation of financial services. Fintech platforms and online marketplaces have been developed to make the financing and assignment of receivables easier.

These platforms employ tech to assess debtor creditworthiness and provide efficient investor and seller matching, including data analytics and artificial intelligence. They provide businesses more autonomy, transparency, and access to a wider range of possible investors.

Securitisation is an essential part of receivables financing. Asset-backed securities (ABS), a type of financial instrument made up of receivables, are then sold to investors.

Businesses are able to turn their receivables into fast cash by transferring the credit risk and cash flow rights to investors. Investors gain from diversification and potentially greater yields through securitisation, while businesses profit from increased liquidity and risk-reduction capabilities.

References:

https://www.tradefinanceglobal.com/finance-products/accounts-receivables-finance/  – 28/10/2018

https://www.legislation.gov.uk/ukpga/2015/26/section/1/enacted  – 28/10/2018

https://www.legislation.gov.uk/ukdsi/2018/9780111171080  – 28/10/2018

https://www.bis.org/publ/bppdf/bispap117.pdf  – Accessed 14/06/2023

https://www.investopedia.com/terms/a/asset-backedsecurity.asp  – Accessed 14/06/2023

https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf  – Accessed 14/06/2023

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Accounts Receivable Assignment: Key Concepts and Business Impact

Explore the essential concepts and business impact of accounts receivable assignment, including cash flow effects and advanced techniques.

Efficient management of accounts receivable is crucial for maintaining a healthy cash flow in any business. Assigning these receivables can be an effective strategy to optimize liquidity and reduce financial risk.

Understanding the implications of this practice helps businesses make informed decisions that align with their financial goals.

Key Concepts of Accounts Receivable Assignment

Accounts receivable assignment involves transferring the rights to collect receivables from a business to a third party, often a financial institution. This practice is typically used to secure immediate cash flow, allowing businesses to meet short-term obligations without waiting for customer payments. The third party, known as the assignee, then assumes the responsibility of collecting the receivables.

One of the primary concepts in accounts receivable assignment is the distinction between recourse and non-recourse agreements. In a recourse agreement, the business retains some liability if the receivables are not collected, meaning they may need to compensate the assignee for any uncollected amounts. Conversely, a non-recourse agreement transfers the full risk of non-payment to the assignee, providing the business with greater financial security but often at a higher cost.

Another important aspect is the discount rate applied by the assignee. This rate reflects the cost of the service and the perceived risk associated with the receivables. Factors influencing the discount rate include the creditworthiness of the customers, the average collection period, and the overall economic environment. Businesses must carefully evaluate these rates to ensure that the benefits of immediate cash flow outweigh the costs.

Impact on Cash Flow

The assignment of accounts receivable can significantly influence a company’s cash flow dynamics. By converting receivables into immediate cash, businesses can bridge the gap between sales and actual cash inflows. This immediate liquidity can be particularly beneficial for companies facing seasonal fluctuations or those in industries with extended payment terms. For instance, a manufacturing firm might use receivable assignment to ensure it has the necessary funds to purchase raw materials, even if its customers take months to pay their invoices.

Moreover, the infusion of cash from receivable assignments can enable businesses to capitalize on growth opportunities. With more liquid assets on hand, companies can invest in new projects, expand operations, or take advantage of bulk purchasing discounts. This proactive approach to cash management can lead to increased profitability and a stronger market position. For example, a retail business might use the funds from assigned receivables to open new store locations, thereby increasing its market reach and revenue potential.

However, it’s important to recognize that while receivable assignment can provide immediate financial relief, it also comes with costs. The discount rate applied by the assignee reduces the total amount of cash received compared to the face value of the receivables. This reduction must be carefully weighed against the benefits of improved cash flow. Additionally, businesses must consider the potential impact on customer relationships, as the assignee will now be responsible for collections. Ensuring that the assignee maintains a professional and courteous approach is essential to preserving customer goodwill.

Accounting Treatment and Reporting

When it comes to the accounting treatment and reporting of accounts receivable assignments, businesses must adhere to specific guidelines to ensure accurate financial statements. The first step involves recognizing the assignment transaction in the accounting records. This typically requires debiting a cash account to reflect the immediate influx of funds and crediting the accounts receivable account to remove the assigned receivables from the company’s books. The difference between the receivables’ face value and the cash received, often due to the discount rate, is recorded as a financing expense or loss.

Proper disclosure is another critical aspect of accounting for receivable assignments. Financial statements must clearly indicate the nature and extent of the receivables assigned, including any recourse obligations if applicable. This transparency helps stakeholders understand the company’s financial position and the potential risks associated with the assigned receivables. For instance, notes to the financial statements should detail the terms of the assignment agreement, the discount rate applied, and any contingent liabilities that may arise from recourse provisions.

Additionally, businesses must consider the impact of receivable assignments on their financial ratios. Metrics such as the current ratio, quick ratio, and accounts receivable turnover can be significantly affected by the removal of receivables from the balance sheet. Analysts and investors often scrutinize these ratios to assess a company’s liquidity and operational efficiency. Therefore, it is essential to provide context and explanations for any substantial changes in these metrics due to receivable assignments.

Advanced Techniques in Receivable Assignment

Advanced techniques in receivable assignment can offer businesses more sophisticated ways to manage their cash flow and financial risk. One such technique is the use of securitization, where receivables are pooled together and sold as securities to investors. This method not only provides immediate liquidity but also diversifies the risk among multiple investors, making it an attractive option for companies with large volumes of receivables. Securitization can be particularly beneficial for industries like telecommunications or utilities, where customer bases are extensive and receivables are substantial.

Another advanced approach is dynamic discounting, which allows businesses to offer early payment discounts to their customers in exchange for quicker cash inflows. Unlike traditional discounting, dynamic discounting uses a flexible rate that can change based on the timing of the payment. This technique leverages technology platforms to automate and optimize the discounting process, ensuring that businesses can maximize their cash flow without sacrificing too much revenue. For example, a software company might use dynamic discounting to encourage its clients to pay invoices within 10 days instead of the standard 30, thereby improving its liquidity.

Managing Uncleared Checks: Financial Impact and Best Practices

Identifying and managing irrelevant costs in business decisions, you may also be interested in..., cost pooling techniques and their financial impact, contribution revenue recognition for nonprofits: key principles and updates, understanding and managing customer deposits in financial reporting, reconciling items in financial reporting and their effects.

• Receivables
• Notes Receivable
• Credit Terms
• Cash Discount on Sales
• Accounting for Bad Debts
• Bad Debts Direct Write-off Method
• Bad Debts Allowance Method
• Bad Debts as % of Sales
• Bad Debts as % of Receivables
• Recovery of Bad Debts
• Accounts Receivable Aging
• Assignment of Accounts Receivable
• Factoring of Accounts Receivable

Assignment of accounts receivable is an agreement in which a business assigns its accounts receivable to a financing company in return for a loan. It is a way to finance cash flows for a business that otherwise finds it difficult to secure a loan, because the assigned receivables serve as collateral for the loan received.

By assignment of accounts receivable, the lender i.e. the financing company has the right to collect the receivables if the borrowing company i.e. actual owner of the receivables, fails to repay the loan in time. The financing company also receives finance charges / interest and service charges.

It is important to note that the receivables are not actually sold under an assignment agreement. If the ownership of the receivables is actually transferred, the agreement would be for sale / factoring of accounts receivable . Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.

The assignment of accounts receivable may be general or specific. A general assignment of accounts receivable entitles the lender to proceed to collect any accounts receivable of the borrowing company whereas in case of specific assignment of accounts receivable, the lender is only entitled to collect the accounts receivable specifically assigned to the lender.

The following example shows how to record transactions related to assignment of accounts receivable via journal entries:

On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a 12% one month note payable. The bank charged 1% initial fee. Company A assigned $73,000 of its accounts receivable to the bank as a security. During March 20X6, the company collected $70,000 of the assigned accounts receivable and paid the principle and interest on note payable to the bank on April 1. $3,000 of the sales were returned by the customers.

Record the necessary journal entries by Company A.

Journal Entries on March 1

Initial fee = 0.01 × 50,000 = 500

Cash received = 50,000 – 500 = 49,500

The accounts receivable don't actually change ownership. But they may be to transferred to another account as shown the following journal entry. The impact on the balance sheet is only related to presentation, so this journal entry may not actually be passed. Usually, the fact that accounts receivable have been assigned, is stated in the notes to the financial statements.

Journal Entries on April 1

Interest expense = 50,000 × 12%/12 = 500

by Irfanullah Jan, ACCA and last modified on Oct 29, 2020

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Assignment of receivables: how to generate cash flow with unpaid invoices

Assigning your accounts receivable to a third party is part of a group of short-term financing options for small businesses. If your customer payment terms are relatively long, you’re often caught short on the cash you need to pay suppliers and staff, or invest in exciting opportunities that arise. 

So the ability to turn unpaid invoices into liquid funds can be very appealing. 

But the process isn’t exactly simple, and many SMBs don’t know what’s involved. So here’s a brief guide to everything you need to know about the assignment of receivables.

Assignment of accounts receivable: definition

The assignment of accounts receivable is a fiscal mechanism by which a creditor (the “assignor”) transfers the rights over an invoice to a third party (the “assignee”) in exchange for a short term loan. 

Here’s an example: suppose a customer owes you a sum of money, due in two months’ time. You can assign that debt to another company as collateral for money up front (a loan). If you fail to repay the loan in time, the other company will then collect payment from the customer in due course. 

The costs can vary, but you can expect to pay interest and some form of processing fees along the way. Obviously, the sooner you repay, the less you’ll pay in the long run. 

Why opt for assignment of receivables? 

This is a strategic tool to optimise working capital and keep your business humming along.  Tangibly, the assignment of receivables puts more cash in your accounts today . This helps you keep up with payments and maintain better relations with your suppliers .

Companies can use assignment of receivables to meet their cash flow needs . It can therefore be useful in a number of contexts:

• Cash management : Assignment of receivables allows you to convert your invoices into immediate cash. You improve your cash flow and meet your short-term financing needs.
• Reducing credit risk : Any credit risk transfers to the assignee. This protects you against the risks associated with unreliable buyers or uncertain economic situations. Of course, the assignee is unlikely to assume too much risk, so this isn’t a sustainable or scalable way to bring down major credit risks.
• Financing and refinancing : Assignment of receivables can be used as a means of financing, enabling you to obtain funds to invest in new projects, cover expenses or repay existing debts.
• Outsourcing receivables management : Invoice administration can be complex and time-consuming. By assigning your receivables, you can outsource the management of collections and payments to the assignee, allowing you to concentrate on your core business.
• Mergers and acquisitions : As part of a company takeover, the assignment of receivables can facilitate the consolidation of financial operations and simplify the transition of commercial relations between the parties involved.

There are potential downsides, even if they’re relatively few: 

• Paying fees and/or interest means that you take home a smaller portion of what the customer owes you . But having the money in your pocket is often more important. 
• You’re involving a third party in your customer relationships , which could potentially become awkward. 
• It can be administratively complex and a slower process than you’d like. We’ll explore some ways to make it more efficient shortly. 

Despite these drawbacks, assigning receivables is often a very attractive option where you’ve done the hard work to sign customers and have real assets (invoices), but don’t have the cash you need.  

Technical requirements for assignments

To be valid, the assignment must be in a written document including certain information : 

• Identification of the parties 
• Nature of the claim
• Amount assigned
• Payment terms and conditions
• Notification to the debtor so that the assignment can be enforced (if necessary)

To get a little more legal , the assigned claim must also meet the following criteria:

• Certain: The claim must not be disputed
• Liquid: It must be quantified or quantifiable
• Due and payable: It must be due and payable on demand
• The debtor must be informed of the assignment by the assignor or the assignee, by registered letter with acknowledgement of receipt, bailiff's deed, or any other means proving receipt.
• Clauses prohibiting further assignments
• Automatic termination clauses
• Forfeiture in the event of assignment

The specific rules may vary from one country to another. Certain claims may be excluded from assignment , in particular those that are linked to the private people or to a particular relationship between the parties, such as alimony, civil or military pensions and wages. 

Legal or contractual restrictions may also limit the possibility of assigning a claim.

Who’s involved in the assignment of receivables?

The main players in the assignment of receivables are:

• The assignor : The company transferring the receivable, whether it is a commercial, industrial or service company.
• The assignee : The party acquiring the receivable, such as a bank or a factoring company. The assignee collects the sums due and assumes the risks of the debtor's insolvency if the assignor can’t repay their loan.
• The assigned debtor : The customer of the assigning company, who must pay its debt to the assignee.

What does an assignment of receivables entail?

The exact implications of an assignment of receivables will vary depending on the jurisdiction, applicable laws, and the agreement you reach. You are strongly advised to seek the advice of a legal professional for advice tailored to your particular situation. An expert will be able to guide you through the laws and regulations in force in your country and help you understand the specific implications of the assignment of receivables.

However, here is a list of common implications:

• Transfer of rights and obligations : The rights attached to the claim are transferred to the assignee, including the right to sue the debtor in the event of non-payment. The assignee may also acquire the obligations associated with the claim, such as the obligation to comply with the agreed repayment terms.
• Notification to the debtor : The assignor is generally required to notify the debtor (the customer) of the assignment of claims, informing them of the change of creditor and obliging them to make payments to the assignee rather than the assignor. The customer may be required to consent to the assignment of claims, depending on the applicable legislation.
• Payment to the assignee : The debtor must make payments to the acquiring company in accordance with the agreed terms. The latter has the right to claim and receive payments relating to the assigned receivable.
• Risks and guarantees : The assignee must assess the risks associated with the receivable before accepting the assignment, including the debtor's solvency and the existence of guarantees or sureties associated with the receivable.

Assignment of receivables vs factoring

While similar, the assignment of receivables is slightly different from factoring . Invoice factoring also involves assigning receivables to a third party, but in that case you essentially sell these assets rather than use them as collateral. A factor will buy a portfolio of invoices from you and take over the collection process from there. 

In both cases you get money now for customer debts that will come due later. The key differences are in the terms and the amount of credit you hand over. 

The assignment of receivables is a strategic tool for optimizing financial management and securing your commercial transactions . It allows the creditor to offload the collection of a debt or to mobilize funds, while offering the assignee the opportunity to acquire receivables at a lower cost and to diversify its portfolio. 

Ultimately, this helps you to keep up your payments and maintain better relations with your suppliers. 

Defacto, a less burdensome, simpler and more flexible alternative

Defacto offers an interesting alternative to the often complicated, legally-intense process described above. We offer short-term loans, using outstanding invoices as proof of your ability to honor them. 

Defacto financing is fast, flexible, and far more affordable than traditional invoice factoring or receivables-based loans. You choose which receivables you want to use to raise funds, and avoid the restrictive rules often imposed by other mechanisms.

In as little as 27 seconds, you can get the funds you need to help you business grow and thrive. See how easy it is here . 

Ready to grow on your own terms?

Every business needs financing, and we’re set on making it simple and fair for all businesses to access it.

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What Is Accounts Receivable (AR)?

• Understanding AR
• Receivable vs. Payable
• What AR Can Tell You

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Accounts Receivable (AR): Definition, Uses, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Accounts receivable (AR) is an accounting term for money owed to a business for goods or services that it has delivered but not been paid for yet. Accounts receivable is listed on the company's balance sheet as a current asset .

Key Takeaways

• Accounts receivable (AR) is an item on a company's balance sheet that represents money due the company for products or services it has already delivered.
• Accounts receivable is considered an asset to the company.
• The opposite of accounts receivable is accounts payable, which reflects money that a company owes but has not yet paid.

Joules Garcia / Investopedia

Understanding Accounts Receivable (AR)

Accounts receivable represents money that a business is owed by its clients, often in the form of unpaid invoices. "Receivable" refers to fact that the business has earned the money because it has delivered a product or service but is, at that point in time, still waiting to receive the client's payment.

Accounts receivable, or receivables, can be considered a line of credit extended by a company and normally have terms that require payments be made within a certain period of time. If effect, the company has accepted an IOU from the client. Depending on the agreement between company and client, the payment might be due in anywhere from a few days to 30 days, 60 days, 90 days, or, in some cases, up to a year. At some point along the way, interest on the debt might also begin to accrue.

Companies record accounts receivable as assets on their balance sheets because the customer has a legal obligation to pay the debt and the company has a reasonable expectation of collecting it. They are considered liquid assets because they can be used as collateral to secure a loan to help the company meet its short-term obligations. Receivables are part of a company's working capital .

Furthermore, accounts receivable are classified as current assets, because the account balance is expected from the debtor in one year or less. Other current assets on a company's books might include cash and cash equivalents , inventory , and readily marketable securities.

Assets that could not easily be converted into cash within a year are recorded as noncurrent assets . That category often includes things like physical property, long-term investments, and intellectual property, such as trademarks.

Accounts Receivable vs. Accounts Payable

When a company owes debts to its suppliers or other parties, those are accounts payable . Accounts payable are the opposite of accounts receivable. To illustrate, Company A cleans Company B's carpets and sends a bill for the services.

Company B now owes Company A money, so it lists the invoice in its accounts payable column. While Company A waits to receive the money, it records the amount in its accounts receivable column.

What Accounts Receivable Can Tell You

Accounts receivable are an important element in fundamental analysis , a common method investors use to determine the value of a company and its securities. Because accounts receivable is a current asset, it contributes to a company's liquidity or ability to cover short-term obligations without additional cash flows. 

Fundamental analysts often evaluate accounts receivable in the context of turnover, also known as the accounts receivable turnover ratio . It measures the number of times a company has collected its accounts receivable balances during an accounting period and is considered an indicator of both how efficient the company is in collecting its debts and the credit quality of its customers.

Further analysis would include assessing days sales outstanding (DSO) , which measures the average number of days that it takes a company to collect payments after a sale has been made.

Example of Accounts Receivable

An everyday example of accounts receivable would be an electric company that bills its clients after the clients receive and consume the electricity. The electric company records an account receivable for unpaid invoices as it waits for its customers to pay their bills. 

Most companies operate by allowing a portion of their sales to be on credit. Sometimes, businesses offer such credit to frequent or special customers, who receive periodic invoices rather than having to make payments as each transaction occurs. In other cases, businesses routinely offer all of their clients the ability to pay within some reasonable period after receiving the products or services.

When Does a Debt Become a Receivable?

A receivable is created any time money is owed to a business for services rendered or products provided that have not yet been paid for. For example, when a business buys office supplies, and doesn't pay in advance or on delivery, the money it owes becomes a receivable until it's been received by the seller.

Where Do I Find a Company's Accounts Receivable?

Accounts receivable are recorded on a company's balance sheet. Because they represent funds owed to the company (and that are likely to be received), they are booked as an asset.

How Are Accounts Receivable Different From Accounts Payable?

Accounts receivable represent funds owed to a company and are booked as an asset. Accounts payable, on the other hand, represent funds that a company owes to others and are booked as liabilities.

What Happens If Customers Never Pay What's Due?

When it becomes clear that a receivable won't be paid by the customer, it has to be written off as a  bad debt expense or a one-time charge. Companies might also sell this outstanding debt to a third party debt collector for a fraction of the original amount—creating what accountants refer to to as accounts receivable discounted .

What Are Net Receivables?

Net receivables is an accounting term for a company's accounts receivable minus any receivables it has reason to believe it will never collect. It is typically expressed as a percentage of uncollectible debts relative to collectible ones, and the lower the percentage, the better.

Accounts receivable is one of the most important line items on a company's balance sheet. It reflects the money owed to a company from the sale of its goods or services that remains to be paid by the buyer. Even though it is not yet in hand, it is considered an asset because the company expects to receive it in due course. The shorter the period of time a company has accounts receivable balances, the better, as it means the company can use that money for other business purposes.

Cornell Law School Legal Information Institute. " Accounts Receivable ."

Office of the Comptroller of the Currency. "Accounts Receivable and Inventory Financing"

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What is the purpose of assigning accounts receivable?

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The purpose of assigning accounts receivable is to provide collateral in order to obtain a loan.

To illustrate, let’s assume that a corporation receives a special order from a new customer whose credit rating is superb. However, the customer pays for its purchases 90 days after it receives the goods. The corporation does not have sufficient money to purchase the raw materials, pay for the labor, and then wait 90 days to collect the receivable. The corporation’s bank or a finance company may lend 80% of the receivable but insists that the receivable be assigned to them as collateral for the loan.

Assigning a specific account receivable usually results in recording the receivable in a separate general ledger account such as Accounts Receivable Assigned. Some lenders require that the corporation’s customer be notified of the assignment and that the customer must remit the receivable amount directly to the bank.

Instead of assigning a specific receivable, the lender may require the corporation to assign all of its receivable as collateral for a loan.

Related Questions

• What is the accounts receivable turnover ratio?
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• How do you estimate the amount of uncollectible accounts receivable?
• What is the days' sales in accounts receivable ratio?
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• How does the aging of accounts receivable determine bad debts expense?

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Assignment of Accounts Receivable: Definition, Benefits, and Emerging Trends

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What is assignment of accounts receivable, how does assignment of accounts receivable work, what are some special considerations for assignment of accounts receivable, emerging trends in assignment of accounts receivable, fintech solutions.

• Access to immediate cash flow
• Allows businesses to leverage their accounts receivable
• May be available to companies with limited credit history or poor credit
• Provides an alternative financing option when traditional loans are not available
• Helps businesses manage cash flow fluctuations
• Higher cost compared to traditional financing options
• Interest rates and service charges can be substantial
• May indicate financial distress to stakeholders
• Loss of control over customer relationships and collections process
• Defaulting on the loan can result in loss of assets

Frequently asked questions

How does assignment of accounts receivable differ from factoring, can any business use assignment of accounts receivable, what happens if a customer defaults on payment, is assignment of accounts receivable a sign of financial distress, what are the eligibility criteria for assignment of accounts receivable, how does assignment of accounts receivable affect financial statements, are there any alternatives to assignment of accounts receivable, how can businesses mitigate the risks associated with assignment of accounts receivable, key takeaways.

• Assignment of accounts receivable allows businesses to access immediate cash flow by leveraging their outstanding invoices.
• While it provides an alternative financing option, it can be costly compared to traditional loans.
• Fintech companies are transforming the accounts receivable financing market with innovative digital solutions.
• Businesses should carefully evaluate the terms and implications of assigning their accounts receivable before entering into agreements with lenders.

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Assignment of receivables – what is it and how does it work?

What is an assignment of receivables.

Whenever we begin to explore a previously unfamiliar topic, there are important terms, without which understanding the whole issue is severely hampered, if not impossible. This is no different.

The dictionary meaning of the word assignment is the relinquishment of part or all of an individual’s rights to another person. In a situation where we have a right to a claim (for example, we are awaiting payment of an obligation from a counterparty), we can relinquish the right to the claim by giving it to a third party – the buyer of the claim. To this end, we enter into a contract of sale, donation, exchange or any other agreement with which the transfer of rights is clear.

Art. 509 of the Civil Code specifies that a creditor may transfer a claim to a third party even without the consent of the debtor – unless this would be contrary to the law, a contractual stipulation or the nature of the obligation. This means that the sale of receivables can – under certain conditions – take place without involving the debtor in the process. We will return to this later in the article.

In a possible contract of assignment of claims, the parties are: the assignor – otherwise known as the creditor, i.e. the person who relinquishes rights to the claim to another entity, and the assignee – the buyer of the claim.

In Art. 509 §2 of the Civil Code reads that the purchaser, when deciding to purchase a receivable, also gains the right to claim overdue interest and any other rights arising from the purchased receivable.

How does the process of assigning receivables work?

The entire process of transferring claims can be encapsulated in several steps. Here is a description of a sample assignment:

Emergence of claims

First, the situation from which the claim arises must arise. In our example, Mr. Arkadiusz, who runs a sole proprietorship, invoiced his contractor, Mr. Jack, for a service rendered – servicing dozens of company computers. The payment term for this invoice is 60 days. With the issuance of the document, a claim is created, which Mr. Arkadiusz can assign to an entity or a third party.

Preparing to enter into an assignment of receivables

Further down the line, it may turn out that – although Mr. Arkadiusz’s company has issued an invoice with a 60-day payment deadline – it cannot afford to wait until the due date. Business practice in Poland, moreover, shows that more than half of entrepreneurs pay their invoices late, which could mean that Mr. Arkadiusz will wait not 60 days, but even longer, for payment.

As a result, the entrepreneur decides to assign the claim to another entity. That’s how – in a nutshell – invoice financing works at PragmaGO.

Mr. Arkadiusz finds a company that decides to purchase the claim from him. In this situation, Mr. Arkadiusz becomes the assignor , while the buyer of the claim becomes the assignee . The parties then agree on the details, such as the form and term of payment or the type of agreement (it can be a written agreement or even a notarial deed – a debt transfer should not be implemented on the basis of an oral agreement).

Contacting the debtor

The next step should be to inform the debtor of the assignment. Although in most cases we don’t need permission to execute an assignment, the debtor must be aware that there has been a transfer of the claim – if only because he should make payments to the new bank account number.

Lack of clear information may result in the debtor paying the previous creditor. This will only lengthen the path the receivable must take.

In a situation where a creditor has notified the debtor that an assignment has taken place, and the debtor nevertheless makes a transfer to the wrong account (for example, to the account of a previous creditor), the current creditor may demand payment from the debtor. This is mentioned in Art. 512 KC:

As long as the transferor has not notified the debtor of the transfer, performance to the previous creditor has effect against the transferee, unless the debtor knew of the transfer at the time of performance. This provision shall apply mutatis mutandis to other legal transactions between the debtor and the previous creditor.

Transfer of receivables

Finally, there is an assignment of receivables, in accordance with the terms of the agreement between the assignor and assignee. This agreement should state what type of receivables the assignment concerns, as well as the value of the assignment and the due date.

When can an assignment be invalid?

There are several situations in which it is impossible to make an assignment of claims under penalty of invalidity:

• When the parties to a transaction have indicated in the contract between them that the claim and the rights arising from it cannot be transferred to another person or entity – this is called an exclusion of the transfer of the claim.
• When the parties to the transaction establish restrictions on the transfer of claims in the contract and these provisions are broken.
• When the assignment opposes the nature of the obligation. This applies to situations where it matters to whom the debtor owes money (e.g., in the case of alimony payments, claims for pension rights, claims for protection of property), as well as when the purpose of the claim can only be achieved if the performance is fulfilled personally to the creditor (this applies to parts of contracts of mandate, contracts of work, leases and rental agreements).

Assignment of receivables orally – is it possible?

In theory, drafting an assignment agreement in writing is not necessary. It can even be concluded verbally, but in the vast majority of cases Art. 511 of the Civil Code, which states that “if a claim is stated in writing, the transfer of that claim should also be stated in writing.”

Moreover, the written form of the assignment significantly facilitates the resolution of any disputes. Even the above-cited Art. 511 of the Civil Code, however, does not preclude the possibility of an assignment based on an oral agreement. This is evidenced by the Supreme Court Judgment of dn. 8.02.2002 r. (ref. II CKN 1160/99), which reads:

The provision of Art. 511 of the Civil Code does not provide for the rigor of nullity if the transfer is made without the requirement of written form. In such a situation, according to Art. 74 § 1 of the Civil Code, failure to observe the written form stipulated in Art. 511 of the Civil Code does not result in the invalidity of the transfer agreement, but only in certain statutory limitations of evidence.

Assignment notarized – when is it mandatory?

Notarization of the assignment of receivables can not only be an additional safeguard against possible problems with the enforcement of the assignment provisions, but also an obligation.

If the creditor has taken legal action against the debtor for an unpaid debt, won the case, and an enforceability clause was imposed on the court judgment or payment order before the assignment was made , the transfer of the claim must be notarized.

Only in this way will the current owner of the claim be able to refer the case to the bailiff without hindrance. If the parties to the assignment decided to enter into it without a notarial deed, the creditor would have no recourse to an already issued judgment or order for payment – after all, all the court documents would refer to a different entity or person.

Assignment of receivables vs. factoring

The concepts of assignment of receivables and factoring are largely intertwined. Factoring service usually boils down to invoice financing, that is, just selling receivables to a factoring company for a certain price. Factoring allows you to regain or strengthen your company’s liquidity, since most of the amount arising from the receivables (up to 90%) is received immediately.

The permanent factoring service at PragmaGO involves compiling a list of contractors with whom we work and to whom we issue sales documents regularly and sending them to the factor. As a result, our company will receive transfers for invoices directly from the factoring company as soon as the sales document is issued.

In many factoring companies, it is possible to buy back a single invoice. All you have to do is apply online and then wait a few hours for the funds to be transferred. Each time you use a factoring service, you may actually be making an assignment of receivables. In this arrangement, the factor can also be called the assignee, while the factor becomes the de facto assignor.

PragmaGO’s factoring, however, comes in three forms: single invoice redemption , permanent online factoring , and financing for company purchases . Depending on the type of factoring chosen (and, consequently, the contract drawn up), the financial liability arrangements for the debtor’s insolvency may vary.

So what are the differences between assignment and factoring?

While carrying out an assignment of receivables makes a simple, one-time exchange, using factoring allows you to opt for a range of additional services.

One of the additional services available in factoring, is the possibility of insuring receivables in case of debtor insolvency. Insurance can cover part or all of the amount.

Another service that we can choose on occasion, as it were, is monitoring of receivables – popular especially among small companies that do not have their own accounting department. The factoring company can also verify foreign counterparties at the request of the factor and assess their solvency and payment discipline.

Prohibition of assignment of receivables – what does it consist of and when is it possible?

Fiduciary transfer of receivables – is there anything to be afraid of?

Does mediation between creditor and debtor pay off?

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Assignment of Accounts Receivable

The financial accounting term assignment of accounts receivable refers to the process whereby a company borrows cash from a lender, and uses the receivable as collateral on the loan. When accounts receivable is assigned, the terms of the agreement should be noted in the company's financial statements.

Explanation

In the normal course of business, customers are constantly making purchases on credit and remitting payments. Transferring receivables to another party allows companies to reduce the sales to cash revenue cycle time. Also known as pledging, assignment of accounts receivable is one of two ways companies dispose of receivables, the other being factoring.

The assignment process involves an agreement with a lending institution, and the creation of a promissory note that pledges a portion of the company's accounts receivable as collateral on the loan. If the company does not fulfill its obligation under the agreement, the lender has a right to collect the receivables. There are two ways this can be accomplished:

General Assignment : a portion of, or all, receivables owned by the company are pledged as collateral. The only transaction recorded by the company is a credit to cash and a debit to notes payable. If material, the terms of the agreement should also appear in the notes to the company's financial statements.

Specific Assignment : the lender and borrower enter into an agreement that identifies specific accounts to be used as collateral. The two parties will also outline who will attempt to collect the receivable, and whether or not the debtor will be notified.

In the case of specific assignment, if the company and lender agree the lending institution will collect the receivables, the debtor will be instructed to remit payment directly to the lender.

The journal entries for general assignments are fairly straightforward. In the example below, Company A records the receipt of a $100,000 loan collateralized using accounts receivable, and the creation of notes payable for $100,000.

In specific assignments, the entries are more complex since the receivable includes accounts that are explicitly identified. In this case, Company A has pledged $200,000 of accounts in exchange for a loan of $100,000.

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Assignment of Accounts Receivable – Trap for the Unwary

By  Steven A. Jacobson

Most businesses are familiar with the mechanics of an assignment of accounts receivable. A party seeking capital assigns its accounts receivable to a financing or factoring company that advances that party a stipulated percentage of the face amount of the receivables.

The factoring company, in turn, sends a notice of assignment of accounts receivable to the party obligated to pay the factoring company’s assignee, i.e. the account debtor. While fairly straightforward, this three-party arrangement has one potential trap for account debtors.

Most account debtors know that once they receive a notice of assignment of accounts receivable, they are obligated to commence payments to the factoring company. Continued payments to the assignee do not relieve the account debtor from its obligation to pay the factoring company.

It is not uncommon for a notice of assignment of accounts receivable to contain seemingly innocuous and boilerplate language along the following lines:

Please make the proper notations on your ledger and acknowledge this letter and that invoices are not subject to any claims or defenses you may have against the assignee.

Typically, the notice of assignment of accounts receivable is directed to an accounting department and is signed, acknowledged and returned to the factoring company without consideration of the waiver of defenses languages.

Even though a party may have a valid defense to payment to its assignee, it still must pay the face amount of the receivable to the factoring company if it has signed a waiver. In many cases, this will result in a party paying twice – once to the factoring company and once to have, for example, shoddy workmanship repaired or defective goods replaced. Despite the harsh result caused by an oftentimes inadvertent waiver agreement, the Uniform Commercial Code validates these provisions with limited exceptions. Accordingly, some procedures should be put in place to require a review of any notice of assignment of accounts receivable to make sure that an account debtor preserves its rights and defenses.

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Pledging Accounts Receivable

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on January 30, 2024

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Definition and explanation.

Pledging accounts receivable is essentially the same as using any asset as collateral for a loan. Cash is obtained from a lender by promising to repay.

If the loan is not repaid, the collateral will be converted to cash, and the cash will be used to retire the debt.

The receivables can be either an identified set of notes and accounts or a general group in which new ones can be added and old ones retired.

The collection of a pledged receivable has no impact on the loan balance.

The pledging agreement usually calls for the substitution of another receivable for the one collected.

As an example, suppose that Sample Company borrows $80,000 on 31 December 2023, and agrees to pay back $81,600 on 1 April 2024.

Further, it pledges $100,000 of trade receivables for the loan. The company would make three journal entries as follows:

The last two entries can be combined, but they are shown separately here to facilitate a comparison of pledging with the other approaches.

The only financial statement disclosures provided for pledged receivables are notes or parenthetical comments.

A similar notation is provided for the notes payable .

Assignor Collects

As an alternative to pledging, the company may decide to assign its receivables to a lending institution.

Under this arrangement, the original holder essentially transfers title to the third party but agrees to collect the receivables and pay the cash to the factor .

Suppose that Sample Company obtains $80,000 cash on 31 December 2023 by assigning $100,000 of its trade receivables.

The company agrees to place the collections in a special restricted checking account from which it will repay the original $80 000 plus a $2,400 finance charge on April 1, 2024.

These journal entries would be made as follows:

To record partial collection of the assigned accounts :

To accrue the finance charge:

To reclassify the uncollected accounts and unrestricted cash:

The disclosures that would be provided on various balance sheet dates are shown in the following example, under the simplifying assumption that no other activity took place.

Notice that the payable to the factor is contra to the assigned accounts. Any restricted cash balance is, in turn, contra to the payable account.

Most arrangements of this type call for more frequent payments than the example shows.

The net result of the assignment is that Sample Company obtained $80,000 by giving up $82,400 of receivables.

Pledging Accounts Receivable FAQs

What is pledging accounts receivable.

Pledging Accounts Receivable means that a business gives up some of its rights to an asset in order to borrow money. For example, you could pledge your car title as collateral for a loan. If the loan isn't repaid, the lender can take possession of your car.

What are the journal entries for pledging accounts receivable?

There are no Special Journal entries required when you pledge your Accounts Receivable as collateral for a loan. The lender still has to approve giving up your Accounts Receivable before making the loan.

How are accounts receivable journal entries prepared?

Accounts Receivable are money owed to a company by their customers for products they've already received. Accounts are recorded in the balance sheet as assets.

What are the journal entries for assigning Accounts Receivable as collateral for a loan?

The entry to record assignment of Accounts Receivable as collateral would be a credit to cash, and a debit to assign Accounts Receivable. The cash account is debited because the company gave up the assigned receivables. The assign Accounts Receivable account is credited because they still owe this money to their customers.

What are the main financial statements in an assignment of accounts receivable?

The three main Financial Statements in an assignment of Accounts Receivable are the income statement, balance sheet, and Cash Flow statement. The income statement and Cash Flow statements would report the repayments on the receivables.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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• Aggressive Saver: $1,000+

How much will you need each month during retirement?

• Bare Necessities: $1,500 - $2,500
• Moderate Comfort: $2,500 - $3,500
• Comfortable Lifestyle: $3,500 - $5,500
• Affluent Living: $5,500 - $8,000
• Luxury Lifestyle: $8,000+

Part 4: Getting Your Retirement Ready

What is your current financial priority.

• Getting out of debt
• Growing my wealth
• Protecting my wealth

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• Tax planning expertise
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• Texts and Status
• Security Interests

United Nations Convention on the Assignment of Receivables in International Trade (New York, 2001)

Date of adoption: 12 December 2001

The purpose of the Convention is to promote the movement of goods and services across national borders by facilitating increased access to lower-cost credit.

Why is it relevant?

The transactions covered by the Convention (e.g. asset-based lending, factoring, forfaiting, securitization, project financing) are fundamental for the financing of international trade. Yet uncertainty as to the content and choice of legal regime applicable to the assignment of receivables constitutes an obstacle to international trade. As a result, an assignment of future receivables or a bulk assignment of receivables that are not identified individually may be ineffective. In addition, an assignment that is effective according to the law under which it was concluded, may not be enforceable as against the debtor in another country or be subordinated to the rights of competing claimants in another country. Moreover, the law applicable to conflicts of priority among competing claimants may be difficult to determine. This means that either credit is not available on the basis of receivables (e.g. the claim for the payment of the purchase price in a contract for the sale of goods) or credit is available but only to those that may be able to afford its cost; and lack of sufficient access to credit or high cost of credit is a disadvantage in particular for small- and medium-size enterprises.

Key provisions

The Convention removes legal obstacles to receivables financing transactions, inter alia, by: (a) validating assignments of future receivables and bulk assignments, and by partially invalidating contractual limitations to the assignment of receivables); (b) enhancing certainty with respect to a number of issues, such as the effectiveness of an assignment as between the assignor and the assignee and as against the debtor; (c) clarifying the law applicable to key issues, such as the priority between competing claims; and (d) providing a substantive law regime governing priority between competing claims that States may adopt on an optional basis.

Relation to private international law and existing domestic law

The Convention applies only to international assignments of receivables and to the assignment of international receivables (with the exception of "financial" receivables). However, the Convention may affect a domestic assignment of a domestic receivable if: (a) it is in conflict with an international assignment of the same receivable; or (b) if it is one in a series of subsequent assignments, one of which, falls within the scope of the Convention. For the debtor, related provisions of the Convention to apply, at the time of the conclusion of the contract from which the assigned receivables arise, the debtor has to be located in a Contracting State or the law governing the assigned receivables has to be the law of a Contracting State.

Additional information

The Convention contains an optional part with applicable law rules and another optional part with substantive rules dealing with the third-party effectiveness and priority of an assignment of receivables.

The Convention is accompanied by an explanatory note. There is also an-article-by-article commentary on the draft Convention that was before the Commission at its 34 th session in 2001.

Additional Resources

• Text - Explanatory note
• UNCITRAL Legislative Guide on Secured Transactions: Supplement on Security Rights in Intellectual Property (2010)
• UNCITRAL Legislative Guide on Secured Transactions (2007)
• United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980)
• General Assembly resolution 56/81

Travaux préparatoires

• Endorsement by American Bar Association (ABA)
• Endorsement by International Chamber of Commerce (ICC)
• A/48/17(SUPP)
• A/CN.9/378/Add.3
• A/49/17(SUPP)
• A/50/17(SUPP)
• A/51/17(SUPP)
• A/52/17(SUPP)
• A/53/17(SUPP)
• A/54/17(SUPP)
• A/55/17(SUPP)
• A/CN.9/472/Add.1
• A/CN.9/472/Add.2
• A/CN.9/472/Add.3
• A/CN.9/472/Add.4
• A/CN.9/472/Add.5
• A/CN.9/489/Add.1
• A/CN.9/490/Add.1
• A/CN.9/490/Add.2
• A/CN.9/490/Add.3
• A/CN.9/490/Add.4
• A.CN.9/490/Add.5
• A/CN.9/491/Add.1
• A/CN.9/WG.II/WP.87
• A/CN.9/WG.II/WP.89
• A/CN.9/WG.II/WP.93
• A/CN.9/WG.II/WP.96
• A/CN.9/WG.II/WP.98
• A/CN.9/WG.II/WP.102
• A/CN.9/WG.II/WP.104
• A/CN.9/WG.II/WP.105
• A/CN.9/WG.II/WP.106