What is 'Assignment Of Accounts Receivable'
Assignment of accounts receivable is a lending agreement, often long term, between a borrowing company and a lending institution whereby the borrower assigns specific customer accounts that owe money (accounts receivable) to the lending institution. In exchange for assignment of accounts receivable, the borrower receives a cash advance for a percentage of the accounts receivable. The borrower pays interest and a service charge on the advance.
BREAKING DOWN 'Assignment Of Accounts Receivable'
If the borrower retains ownership of the accounts, then the borrower continues to collect the accounts receivable and passes the payments on to the lender. Since the borrower retains ownership, he also 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 factoring of accounts receivable.