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 of the accounts receivable. This percentage may be as high as 100%. 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.
BREAKING DOWN 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 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 is typically more expensive than other forms of borrowing. Companies that use it often are unable to obtain less expensive options. Sometimes it is used by companies that are growing rapidly or otherwise have too little cash on hand to fund their operations.