The assignment of receivables may be general or special. A general assignment of receivables gives the lender the right to collect any receivable from the borrowing company, while the lender has the right to collect the receivables assigned to the lender only in the case of a specific assignment of receivables. Most account debtors know that after receiving an assignment of receivables, they are required to start making payments to the factoring company. Continuous payments to the assignee do not release the account debtor from its obligation to pay the factoring company. As a rule, the notice of assignment of receivables is sent to an accounting department and signed, confirmed and returned to the factoring company, regardless of the waiver of the defense languages. An assignment of receivables is generally more expensive than other forms of borrowing. Companies that use it are often unable to get more cost-effective options. Sometimes it is used by companies that are growing rapidly or have too little liquidity available to fund their operations. While a party may have a valid defense against payment to its assignee, it must still pay the principal amount of the receivable to the factoring company if it has signed a waiver. In many cases, this results in a party that pays twice – once to the factoring company and once, for example, to repair a lower workmanship or have defective goods replaced. Despite the severe result caused by an often involuntary waiver, the Unified Commercial Code validates these provisions with a few exceptions.
Therefore, certain procedures should be put in place to require a review of any notice of assignment of receivables to ensure that a debtor respects its rights and defences. It is not uncommon for a notice of assignment of receivables to contain seemingly innocuous and textual wording in the following directions: By assigning receivables, the lender, i.e. the finance company, has the right to collect the receivables if the borrowing company, i.e. the actual owner of the receivables, does not repay the loan on time. The finance company also receives a financing fee/interest and service fee. The factoring company, in turn, sends a notice of assignment of receivables to the customer of the factoring company, that is, to the debtor of the account, who is required to pay. Although this tripartite agreement is quite simple, it risks trapping account debtors. Most companies are familiar with the mechanisms for assigning accounts receivable. A capital-seeking party assigns its receivables to a finance or factoring company, which pays a fixed percentage of the nominal amount of the receivables to that party. Assignment of receivables is an agreement by which a company assigns its receivables to a finance company in exchange for a loan. It is a way to finance the cash flow of a business that would otherwise have difficulty obtaining a loan because the assigned receivables serve as collateral for the loan received.
In the event of an assignment of receivables, the borrower retains ownership of the assigned receivables and thus retains the risk that certain receivables will not be repaid. In this case, the lending institution may require payment directly from the borrower. This regulation is called “assignment of receivables with recourse”. Assignment of receivables should not be confused with collateral or debt financing. It is important to note that receivables are not actually sold under an assignment contract. If ownership of the receivables is actually transferred, the contract would be for the sale/factoring of the receivables. As a general rule, the borrowing company would collect the assigned receivables itself and transfer the loan amount as agreed. Only if the borrower does not pay as agreed does the lender receive the right to collect the assigned receivables itself. The assignment of receivables is a credit agreement in which the borrower assigns receivables to the lending institution.
In return for this assignment of receivables, the borrower receives a loan for a percentage of the receivables. This percentage can go up to 100%. The borrower pays interest and service fees on the loan and the assigned receivables serve as collateral. In other words, if the borrower does not repay the loan, the agreement allows the lender to collect the assigned receivables. Trade receivables don`t really change hands. However, they can be transferred to another account, as shown in the following log entry. The impact on the balance sheet is only about the presentation, so this journal entry may not actually be transmitted. As a general rule, the fact that receivables have been assigned is disclosed in the notes to the annual financial statements. Please take the correct notes in your general ledger and confirm this letter and that the invoices are not the subject of any claim or defense you may have against the assignee. On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a monthly 12% payable bond.
The bank charged an upfront fee of 1%. Company A transferred $73,000 of its receivables to the bank as security. In March 20X6, the company recovered $70,000 of the assigned receivables and paid the principle and interest on the promissory notes payable to the bank on April 1. $3,000 in sales were returned by customers. .