assigned assignment of receivables

• Search Search Please fill out this field.
• Corporate Finance
• Corporate Debt

Assignment of Accounts Receivable: Meaning, Considerations

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.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Investopedia / Jiaqi Zhou

What Is Assignment of Accounts Receivable?

Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution. In exchange for this assignment of accounts receivable, the borrower receives a loan for a percentage, which could be as high as 100%, of the accounts receivable.

The borrower pays interest, a service charge on the loan, and the assigned receivables serve as collateral. If the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.

Key Takeaways

• Assignment of accounts receivable is a method of debt financing whereby the lender takes over the borrowing company's receivables.
• This form of alternative financing is often seen as less desirable, as it can be quite costly to the borrower, with APRs as high as 100% annualized.
• Usually, new and rapidly growing firms or those that cannot find traditional financing elsewhere will seek this method.
• Accounts receivable are considered to be liquid assets.
• If a borrower doesn't repay their loan, the assignment of accounts agreement protects the lender.

Understanding Assignment of Accounts Receivable

With an assignment of accounts receivable, the borrower retains ownership of the assigned receivables and therefore retains the risk that some accounts receivable will not be repaid. In this case, the lending institution may demand payment directly from the borrower. This arrangement is called an "assignment of accounts receivable with recourse." Assignment of accounts receivable should not be confused with pledging or with accounts receivable financing .

An assignment of accounts receivable has been typically more expensive than other forms of borrowing. Often, companies that use it are unable to obtain less costly options. Sometimes it is used by companies that are growing rapidly or otherwise have too little cash on hand to fund their operations.

New startups in Fintech, like C2FO, are addressing this segment of the supply chain finance by creating marketplaces for account receivables. Liduidx is another Fintech company providing solutions through digitization of this process and connecting funding providers.

Financiers may be willing to structure accounts receivable financing agreements in different ways with various potential provisions.​

Special Considerations

Accounts receivable (AR, or simply "receivables") refer to a firm's outstanding balances of invoices billed to customers that haven't been paid yet. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payments due within one year.

Accounts receivable are considered to be a relatively liquid asset . As such, these funds due are of potential value for lenders and financiers. Some companies may see their accounts receivable as a burden since they are expected to be paid but require collections and cannot be converted to cash immediately. As such, accounts receivable assignment may be attractive to certain firms.

The process of assignment of accounts receivable, along with other forms of financing, is often known as factoring, and the companies that focus on it may be called factoring companies. Factoring companies will usually focus substantially on the business of accounts receivable financing, but factoring, in general, a product of any financier.

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

• 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

Related Topics

• Sales Returns

All Chapters in Accounting

• Intl. Financial Reporting Standards
• Introduction
• Accounting Principles
• Business Combinations
• Accounting Cycle
• Financial Statements
• Non-Current Assets
• Fixed Assets
• Investments
• Revenue Recognition
• Current Assets
• Inventories
• Shareholders' Equity
• Liability Accounts
• Accounting for Taxes
• Employee Benefits
• Accounting for Partnerships
• Financial Ratios
• Cost Classifications
• Cost Accounting Systems
• Cost Behavior
• CVP Analysis
• Relevant Costing
• Capital Budgeting
• Master Budget
• Inventory Management
• Cash Management
• Standard Costing

Current Chapter

XPLAIND.com is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!

Copyright © 2010-2024 XPLAIND.com

The Difference Between Assignment of Receivables & Factoring of Receivables

• Small Business
• Money & Debt
• Business Bank Accounts
• ')" data-event="social share" data-info="Pinterest" aria-label="Share on Pinterest">
• ')" data-event="social share" data-info="Reddit" aria-label="Share on Reddit">
• ')" data-event="social share" data-info="Flipboard" aria-label="Share on Flipboard">

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?

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.

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.

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

Related Articles

The advantages of selling accounts receivable, buying accounts receivable, difference between payables and receivables in accounting, the role of factoring in modern business finance, the prevention of dilution of ownership, how to remove an empty mailbox in outlook, the importance of factoring in business, how to factor inventory, setting up webmail on mail for the imac, most popular.

• 1 The Advantages of Selling Accounts Receivable
• 2 Buying Accounts Receivable
• 3 Difference Between Payables and Receivables in Accounting
• 4 The Role of Factoring in Modern Business Finance

Double Entry Bookkeeping

learn bookkeeping online for free

Home > Accounts Receivable > Assignment of Accounts Receivable Journal Entries

Assignment of Accounts Receivable Journal Entries

The assignment of accounts receivable journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of accounts receivable assignment.

The assignment of accounts receivable journal entries are based on the following information:

• Accounts receivable 50,000 on 45 days terms
• Assignment fee of 1% (500)
• Initial advance of 80% (40,000)
• Cash received from customers 6,000
• Interest on advances at 9%, outstanding on average for 40 days (40,000 x 9% x 40 / 365 = 395)

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

You May Also Like

• Trade Finance
• Letters of Credit
• Trade Insurance & Risk
• Shipping & Logistics
• Sustainable Trade Finance
• Incoterms® Rules 2020
• Research & Data
• Conferences
• Purchase Order Finance
• Stock Finance
• Structured Commodity Finance
• Receivables Finance
• Supply Chain Finance
• Bonds and Guarantees
• Find Finance Products
• Get Trade Finance

• Incoterms® 2020
• Letters of Credit (LCs)

Receivables Finance And The Assignment Of Receivables

Tfg legal trade finance hub, receivables finance and the assignment of receivables.

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

International Trade Law

1 | Introduction to International Trade Law 2 | Legal Trade Finance 3 | Standard Legal Charges 4 | Borrowing Base Facilities 5 | Governing law in trade finance transactions 6 | SPV Financing 7 | Guarantees and Indemnities 8 | Taking security over assets 9 | Receivables finance and the assignment of receivables 10 | Force Majeure 11 | Arbitration 12 | Master Participation Agreements 13 | Digital Negotiable Instruments 14 | Generative AI in Trade Law

Access trade, receivables and supply chain finance

Contact the trade team, speak to our trade finance team, want to learn more about trade finance download our free guides.

Learn more about Legal Structures in Trade Finance

Digital Negotiable Instruments

Electronic Signatures

Force Majeure

Master Risk Participation Agreements In Trade Finance

What is a Creditor?

What is a debtor (debitor).

About the Author

Trade Finance Global (TFG) assists companies with raising debt finance. While we can access many traditional forms of finance, we specialise in alternative finance and complex funding solutions related to international trade. We help companies to raise finance in ways that is sometimes out of reach for mainstream lenders.

Search form

• 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)
• Endorsement by International Factors Group (IFG)
• 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

Our Insights

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.

• Announcement

Assignment Of Accounts Receivable

• On June 23, 2020
• By Attik Zakir

In cases like these, creditors may be willing to get rid of them swiftly for pennies on the dollar if it means improving their financial outlook and appeasing worried investors. At other times, the creditor may decide the debt is too old to waste its resources on collections, or selling or assigning it to a third party to pick up the collection activity. In these instances, a company would not assign their debt to a third party.

Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution. In exchange for this assignment of accounts receivable, the borrower receives a loan for a percentage of the accounts receivable. The borrower pays interest and a service charge on the loan and the assigned receivables serve as collateral. That is, if the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.

This is a letter signed by a company officer (but mailed by the auditor) to customers selected by the auditors from the company’s accounts receivable aging report. The letter requests that customers contact the auditors directly with the total amount of accounts receivable from the company that was on their books as of the date specified in the confirmation letter. The latter alternative is safer from the perspective of the lender (and is therefore more commonly used), since it allows for more specific identification of those receivables least likely to be collected. The lender may also specifically exclude any receivables for which the company has granted unusually long payment terms.

Under a pledging agreement, the company retains title to and is responsible for collecting accounts receivable, not the lender. Even though the lender now has a legal interest in the receivables, it is not necessary to notify customers of this interest.

With an assignment of accounts receivable, the borrower retains ownership of the assigned receivables and therefore retains the risk that some accounts receivable will not be repaid. In this case, the lending institution may demand payment directly from the borrower. This arrangement is called ‘assignment of accounts receivable with recourse’. Assignment of accounts receivable should not be confused with pledging or with accounts receivable financing.

Recourse Loans vs. Non-Recourse Loan: What’s the Difference?

This allowance is an estimation of the total number of receivables that will not be paid. Another important area to note is that gross accounts receivable is different from net accounts receivable.

As mentioned above, gross accounts receivable refer to all open invoices. However, net accounts receivable is the likelihood of receiving payments from customers. In simpler terms, gross accounts receivable doesn’t take into account the probability of customer default whereas net accounts receivable does. Gross accounts receivable is the amount of sales, credits or open invoices that a business has sent to customers that have yet to receive payment.

By being this conservative in calculating the maximum amount to be loaned, the lender protects itself from issuing debt that cannot be fully offset by collateral in the event of a payment default. If a company wishes to audit its accounts payable records, it must review any outgoing funds associated with debt obligations or creditor payments. The process may require a review of billings and a reconciliation of those amounts with payments that were recorded as being made.

Once a payment is received then the invoice is closed and the payment is posted on the chart of accounts, which officially records the payment on the books. There are several reasons why a creditor may decide to assign its debt to someone else. This option is often exercised to improve liquidityand/or to reduce risk exposure. Alternatively, it might have accumulated lots of high-risk loans and be wary that many of them could default.

• Auditors also use positive confirmation letters to verify accounts payable and accounts receivable or companies.

What is Assignment Of Accounts Receivable

What is receivable assignment.

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.

Accounts receivables are short-term assets and can be used by companies as collateral to obtain loans or financing from banks. As a result, it’s important that the receivables are audited to confirm that the sales were made as well as confirm that the funds from the sales are being collected on time.

Intermediate Accounting I-Chapter 7

This doesn’t always mean that they are putting more pressure on their customers to pay, though. Sometimes they turn to their accounts receivable as a way to receive a small loan. In fact, millions of dollars from small businesses flows through factoring companies each year. The companies sell their accounts receivable to a factoring company, so they can receive cash up front then the factoring company collects on the past due payment. Bad Debt Expense.This typically refers to a company’s loss due to good and/ or services that were sold or provided without collecting full payment.

When you use an aging schedule approach for estimating uncollectible accounts?

Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution. The borrower pays interest and a service charge on the loan and the assigned receivables serve as collateral.

These non-payments eventually become “bad debts” and are written off as “bad debt” expenses. Bad debts ultimately impact net accounts receivable and are taken away from gross accounts receivable. However, there are different types of accounts receivables you need to monitor, especially if you want to ensure on-time customer payments. Keeping a close eye on your accounts receivable will help build overall financial preparation and management for the business. When an auditor is examining the accounting records of a client company, a primary technique for verifying the existence of accounts receivable is to confirm them with the company’s customers.

Additionally, the business may choose to match the aforementioned amounts to actual withdrawals from payment accounts to confirm accuracy. An auditor can verify the accuracy of the accounts receivable records being examined by determining if the records accurately reflect the transactions that have occurred between the company and its customers. Contacting customers directly helps auditors verify that listed accounts actually exist, that balances shown as owed are correct, and that payments marked as received are true. Although calculating and monitoring gross accounts receivable sounds complicated, the math is relatively easy to understand once you spend some time reviewing your business’ balance sheet.

Ways to Help Family Members in Financial Trouble

Auditors also use positive confirmation letters to verify accounts payable and accounts receivable or companies. Accounts payables are short-term debts owed by companies to their suppliers. Accounts receivables represent money owed by a company’s customers for the sale of goods. Receivables and payables typically have payment terms of 30, 60, or 90 days—meaning a payment needs to be made within that time frame. [vc_row][vc_column][vc_column_text]When it comes down to it and you’re strapped for cash, a lot of businesses tend to turn to their accounts receivable.

If customers do not return confirmations to the auditor, the auditor may go to considerable lengths to obtain the confirmations, given the high quality of this form of evidence. If there is no way to obtain a confirmation, then the auditor’s next step is to investigate subsequent cash receipts, to see if customers have paid for those invoices that were not confirmed. This is a strong secondary form of evidence that the accounts receivable outstanding at the end of the reporting period being audited were in existence at that time.

Related posts:

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.

Related Terms

Contributors

Moneyzine Editor

In the realm of trade credit security, factoring, forfaiting, and assignment of receivables share a common thread – they all revolve around the utilization of receivables as financial instruments. However, it is crucial to recognize that while they may seem similar due to their reliance on receivables, they differ fundamentally in their use and application. Let's explore how these financial strategies, though linked by receivables, serve distinct purposes in the world of trade credit security.

Factoring and Forfaiting:

Factoring involves the sale of a business's accounts receivable to a specialized financial entity, known as a factor, at a discounted rate. The factor takes on the responsibility of collecting customer payments, offering rapid access to cash flow and bolstering liquidity.

Principal Difference: Transfer of Ownership

The fundamental distinction lies in the transfer of ownership. In factoring, the trade creditor relinquishes ownership of the accounts receivable to the factor. This means the factor or forfaiter becomes the new legal owner of the receivables and directly manages the collection process. The trade creditor essentially converts future payments into immediate capital.

Assignment of Receivables:

Assignment of receivables, on the other hand, is a process where the rights and benefits of a receivable are transferred from one party (assignor) to another (assignee). It serves as a tool for credit risk management, allowing businesses to transfer the risk of non-payment or default to the assignee while stabilizing cash flow.

Principal Difference: Retention of Ownership

In contrast to factoring, in the assignment of receivables, ownership of the receivables remains with the assignor. The assignee, while assuming responsibility for collecting payments, does not become the new legal owner of the receivables. Instead, they act on behalf of the assignor to ensure payment collection.

In essence, while both factoring and assignment of receivables offer solutions for managing credit risk and enhancing cash flow, their fundamental difference lies in the ownership structure. Factoring involves the sale and transfer of ownership of accounts receivable to a factor, while assignment of receivables retains ownership with the assignor, with the assignee acting as a collector.

Businesses evaluating these trade credit security options should carefully consider their preferences, goals, and impact on customer relationships to determine which approach best aligns with their financial strategies.

#credit #creditmanagement #creditrisk #creditworthiness #creditengineering

Table of Contents

Pledge vs assignment of receivables.

Pledge Vs Assignment Of Receivables is a subject of growing interest among creditors and debtors alike. Both mechanisms allow for the transfer of rights to future payments, and both have their own unique benefits and drawbacks. Understanding the differences between these two options is essential not just for those who are directly involved in the transaction but also for any third parties that may be impacted.

What’s The Difference Between A Pledge And Assignment Of Receivables? We Break It Down For You.

Are you trying to determine the difference between a pledge and an assignment of receivables ? If so, you are not alone. Knowing the difference between a pledge and assignment of receivables can be difficult, but it doesn’t have to be. In this blog post, we’ll break down the differences between a pledge and assignment of receivables, so you can understand the difference between the two.

What Is A Pledge?

A pledge is a legal agreement in which a person or business pledges a particular asset as collateral for a loan. The pledged asset can be used as security for the loan and if the borrower defaults on their loan, the lender can take possession of the asset and use it to recover some or all of the debt.

Pledging an asset requires the borrower to give up ownership rights until the debt is paid in full, or the pledge is released by the lender. A pledge is often used when the borrower needs quick access to capital, but does not want to completely surrender ownership of the asset.

Pledge Vs Assignment Of Receivables:

The primary difference between a pledge and assignment of receivables is that a pledge involves giving up possession of an asset while an assignment of receivables involves assigning rights to receive payments from a debtor. When you pledge an asset, you are transferring title and possession to the lender while with an assignment of receivables, you are assigning your rights to collect payments from a debtor to the lender. 

In both cases, you are taking on additional risk since you are no longer in control of the asset or receivables. However, with a pledge, you are taking on more risk because you are giving up ownership rights until the debt is paid in full. With an assignment of receivables, you are still in control of collecting payments from your debtors.

What Is An Assignment Of Receivables?

An assignment of receivables is a legal agreement that transfers the rights to receive payments from a debtor to another party, known as the assignee. The assignee becomes the new owner of the receivable, and is entitled to the payment from the debtor. This type of agreement can be used in many different financial scenarios, such as when a company needs to raise capital by selling off some of its receivables, or when a creditor wishes to secure debt repayment. In comparison to a pledge, an assignment of receivables is generally more involved and requires more paperwork, but it can also offer more legal protection than a pledge.

The Key Differences Between Pledges And Assignments Of Receivables

Pledges and assignments of receivables are two different financing tools used by businesses. While both are forms of secured financing, the major difference between them is in the structure of the agreement. 

A pledge is a type of security interest that gives a creditor the right to take possession of an asset if the borrower defaults on their loan. It also allows the creditor to have a claim over a piece of property as collateral against repayment. This means that the creditor has rights to the pledged asset should the borrower not be able to meet their debt obligations. 

On the other hand, an assignment of receivables involves transferring title or ownership of a certain amount of a company’s invoices to a third-party financier, such as a bank or factor, who will collect the payment on behalf of the company. The financier pays an advance to the company at a discount and then collects the full amount from the debtor. The financier bears the credit risk and any delays in collection of payments are the responsibility of the factor.

In summary, while both involve a security interest and provide capital to companies, pledges and assignments of receivables differ in terms of structure and level of risk assumed. Pledges grant creditors rights to an asset as collateral, whereas with assignments of receivables, third-party financiers bear the credit risk and any delays in collection of payments.

When Should You Use A Pledge Vs An Assignment Of Receivables?

Whether you choose to use a pledge or assignment of receivables depends on the specific needs of your situation. A pledge is often used in cases where the lender is seeking more assurance that the loan will be repaid, such as when there is a risk of the borrower not paying the loan back. When a pledge is used, the borrower has to give up possession and control of the assets pledged.

An assignment of receivables, on the other hand, is used when the lender wants to secure payment from a third-party rather than from the borrower directly. In this case, the borrower assigns the right to receive payments from the third-party to the lender in order to secure the loan. This means that if the third-party fails to make their payments, the lender can pursue legal action against them to recover their funds.

When deciding between pledge vs assignment of receivables, it is important to consider your unique circumstances and goals. If you have a high risk of default, a pledge may be a better choice as it provides greater assurance of repayment. However, if you are looking to secure payment from a third-party, an assignment of receivables may be preferable. Ultimately, it is important to speak to a financial advisor or lawyer who can help you determine which option is best for your needs.

What is Pledge Vs Assignment of Receivables?

Creating an Accounts Receivable Assigned Journal Entry is a good way to control cash flow and minimize your credit exposure by having a greater degree of control over your receivables. It allows you to reduce the time spent in account collection activities and increase cash flow more quickly.

What are the benefits of using Pledge Vs Assignment of Receivables?

Assignment of receivables is the process by which a company sells its debt receivable to a third party. This can involve setting up a special purpose entity and assigning the receivables to it as security for the sale. Assignment of receivables has benefits over pledge of assets because it allows access to cash immediately, in addition to providing certainty of payment.

What are the key considerations when choosing between Pledge Vs Assignment of Receivables?

The main consideration when choosing between Pledge Vs Assignment of Receivables is whether your company is willing and able to repay debt. If this is a concern, then you may want to consider an assignment of the receivables instead.

Trending News

Related Practices & Jurisdictions

• Bankruptcy & Restructuring
• Litigation / Trial Practice
• Administrative & Regulatory
• European Union

The validity of an assignment of receivables cross-border depends on the law that applies to the assignment.

What might amount to a valid assignment in one jurisdiction does not mean that it is valid in another, and where there are competing claims to the receivables and competing jurisdictions, the question of which law applies - and therefore whether there has been a valid assignment - significantly affects the ability of the assignee to rely on the assignment.

This question arose in the context of a German bankruptcy where the issue was referred to the European Court of Justice (“ECJ “) for a preliminary ruling. The recent decision of the ECJ of 9 October 2019 surprised many because it went against the commonly held view that in determining jurisdictional questions Article 14 of the European Union Rome I Regulation applied.

In this blog we consider the implications of the ECJ judgment in Case C-548/18 BGL BNP Paribas SA vs. TeamBank AG Nürnberg and how this affects assignees and the priority of competing claims. We also consider the proposed EU Assignment Regulation and how that might assist in determining the question of jurisdiction in the future.

A national of Luxembourg (the “employee”) but resident of Germany was employed by a Luxembourg employer under Luxembourg law. A German bank granted a German law governed loan to the employee and the employee assigned to the German bank all its claims to receive remuneration from the Luxembourg employer.

Three months later the employee obtained another loan, this time from a Luxembourg bank and assigned the same remuneration claims as security for that second loan to the Luxembourg bank under a Luxembourg law governed assignment contract. The Luxembourg bank notified the assignment to the Luxembourg employer, the German bank did not do so.

The employee became insolvent and German insolvency proceedings were commenced.

Under German law notification of an assignment is not required to perfect the assignment, but under Luxembourg law it is. Accordingly, in this case if German law applied the assignment to the German bank would have had priority over the assignment to the Luxembourg bank but if Luxembourg law the priority position would have been reversed.

Which law therefore took precedence? The German court requested the ECJ give a preliminary ruling on the question.  Contrary to the commonly held view, the ECJ concluded that Article 14 of the Rome I Regulation did not assist and was therefore unable to provide for an answer to the question leaving the German court in a challenging situation particularly so, because the relevant rules for determining the conflict of law were actually deleted from German law in 2009.

So which law do the courts apply when determining whether there has been a valid cross-border assignment of receivables? Currently the answer depends on which country is being asked to consider the question:

(i)             It could be the law which is expressed to govern the contract from which the assigned receivable arises. This is the approach normally adopted in Germany.

(ii)            In England, the Netherlands and Spain it is in principle the law chosen by the assignor and the assignee to govern the contract under which the receivable is assigned;

(iii)           Whereas in the U.S., for example it is in principle the law of the jurisdiction in which the assignor is situated.

The position is far from clear meaning that an assignees of receivables cannot always be certain whether the assignment is valid and enforceable.

Hope for the future? -The proposed EU Assignment Regulation

Thankfully the European Union intends to introduce new legislation that will help clarify the position. The Assignment Regulation proposed in March 2018 is currently being discussed in the Council of the European Union. However it is likely to be subject to extensive negotiation before adoption.

The principles set out in Article 4 of the Assignment Regulation are that the law of the habitual residence of the assignor will apply (Article 4 (1)) unless:

the claim is cash credited to a bank account or claims arising from financial instruments, in which case the law governing the account or the financial instrument will apply (Article 4 (2)), or

there is a securitization, in which case the assignee and the assignor can chose the law applicable to the assignment (Article 4 (3)).

Once adopted (subject to a 18 month waiting period) the Assignment Regulation will be directly applicable. This means that whilst EU Member States do not need to implement it into their domestic laws the courts of the Member States are bound to apply it in respect of all assignments which are concluded on or after the date it comes into effect.

However, the Assignment Regulation will not apply in Denmark, it will only apply in Ireland if Ireland opts into the Assignment Regulation and will not apply to the UK since it is expected that the UK will no longer be a EU Member State at the time the regulation is adopted and becomes effective.

The Assignment Regulation does not allow parties to contract out of it or to agree the applicable law which shall regulate the assignment of claims.

Major impact on international trade finance

The Assignment Regulation is expressed to have Universal Application, which means that it will apply the law designated by the assignment, even if this is not the law of any Member State.

For example, if a US exporting company assigns an invoice or other claim arising from a contract governed by German law to an EU assignee, then US law will apply in determining whether the assignment was effective vis-à-vis third parties, and not German law.

Because of this rule the Assignment Regulation will have a major impact on international trade finance involving the assignment of receivables. It could also create uncertainty over which law is applicable if the relevant third country’s law does not recognize the rule contained in Article 4(1).

What is the effect of the Assignment Regulation on Bank Accounts?

Bank accounts and account pledges will continue to be governed by the law of the country where the relevant bank is situated, provided that the account mandate prescribes that the law of that country shall govern the banking relationship.

However, this will only apply to bank accounts held with banks where the head office is situated within the European Union and to branches of third country banks which are located within the European Union.

In respect of banks situated outside of the European Union Article 4 (1) applies and the relevant account security will be governed by the law of the country where the bank has its place of central administration. .

What is the effect of the Assignment Regulation on Financial Instruments?

The law that applies to Financial Instruments will be the law governing the instrument. Article 2 (i) of the Assignment Regulation defines “Financial Instrument” as the instruments specified as such in the MIFID II Directive (Section C of Annex I of Directive 2014/65/EU of 15 May 2014).

It is unclear how this will affect the German Schuldschein -Market, since Schuldscheine with a term of more than 397 days may not qualify as a Financial Instrument. This could mean that secondary trading in such Schuldscheine becomes quite complex since the assignment of the relevant Schuldscheine will not be governed by German law, but by the law of the jurisdiction where the previous holders of the Schuldscheine is situated – and this could be any number of jurisdictions

What is the effect of the Assignment Regulation on securitization?

Presently the Assignment Regulation provides that the assignor and the assignee of a receivable/claim may choose the law applicable to the assignment of the securitization. However, the European Parliament propose to delete this exemption. This is disappointing because the proposal made by the European Commission could make securitization much easier and less complex than is currently the case.

What is the position in respect of Factoring, Asset Based Lending and Invoice Discounting?

Article 4(1) will apply to all other forms of receivable finance such as factoring, asset based lending, invoice discounting or other forms of supply chain finance. Accordingly the law of the central place of administration of the assignor determines the effectiveness and perfection of the assignment vis-à-vis third parties.

In practice that rule will make the financing of portfolios of receivables (which could be subject to a multitude of jurisdictions) much easier, where they are owned by one assignor situated in one jurisdiction. In that case it will be much easier to identify the one relevant law applicable.

Conversely, it will make it more difficult to finance portfolios of those receivables where assignors are situated in various jurisdictions but the receivables themselves are governed by the same law.

How does the Assignment Regulation apply to cross-border assignments in insolvency?

The difficulty here, is that the relevant test for the purposes of Article 4(1) of the Assignment Regulation in determining the “habitual residence” of the assignor is the “ place of central administration ” whereas the test under the EU Insolvency Regulation is the “centre of main interests” (COMI) and the presumption that the COMI is the company’s registered office. There is no such assumption under the Assignment Regulation.

Applying either of those tests may result in the same answer but it cannot be excluded that the location of the assignor could be different in some circumstances, resulting in uncertainty as to which law might apply to cross-border assignments in insolvencies.

Further, unlike under the EU Insolvency Regulation where the definition of COMI requires the company to have held its centre of main interests for 3 months, the same does not apply under the Assignment Regulation. Therefore, it could make it difficult to identify the “place of central administration” if the assignor has recently changed location, and again, the ability to identify the relevant applicable law.

The principles set out in the Assignment Regulation are welcome because they provide much needed clarity on which law applies when determining the validity of an assignment of receivables cross-border. It will provide more certainty to assignees, and hopefully lead to less litigation as a consequence.

Current Legal Analysis

More from squire patton boggs (us) llp, upcoming legal education events.

Sign Up for e-NewsBulletins

• Implementing Receivables Credit to Cash

Revenue Contingency Assignment Rules

Use the Revenue Contingency Assignment Rules pages to define rules for automatically assigning revenue contingencies to transactions.

A revenue contingency assignment rule consists of:

Rule name and optional description.

Revenue contingency to assign to transactions.

One or more parameters that contain the conditions under which the contingency is assigned.

The rule parameters available for rule definition include:

Revenue Scheduling Rule

Transaction Source

Bill-to Customer

Bill-to Site

Customer Profile Class

Business Unit

Ship-to Customer

Ship-to Site

Transaction Type

You can define multiple rules with different matching criteria that return the same contingency, and you can also define multiple rules with the same matching criteria that return multiple contingencies.

After you create an assignment rule, you can test the rule to ensure that all expressions are accurate and the rule functions as expected.

Revenue contingency assignment rules let you automate the assignment of contingencies to transactions in a way that reflects the practical needs of your enterprise. You typically use these rules to support the contingency assignment requirements that aren't supported by your revenue policy setup.

For example, you may want to require Customer ABC to manually accept an item before recognizing revenue on the related transactions. To make this a mandatory process:

Create a new revenue contingency assignment rule.

Select the revenue contingency Explicit Acceptance for this rule.

Select Bill-to Customer as the rule parameter.

Enter the related customer condition.

With this defaulting rule in place, Receivables assigns the Explicit Acceptance contingency to all transaction lines for Customer ABC, and defers revenue until the customer acknowledges acceptance of each line item.