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.
- 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.
- Normally firms that are new and rapidly growing or those that cannot find traditional financing elsewhere will seek this method.
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 '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. 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.
New startups in Fintech are addressing this segment of the supply chain finance by creating marketplaces for account receivables. One name in this space is C2F0. Liduidx is another Fintech company providing solutions through digitization of this process and connecting funding providers.
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 fairly 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 the assets 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, may be a product of any financier. Financiers may be willing to structure accounts receivable financing agreements in different ways with a variety of different potential provisions.