An assignment of accounts receivable is a process by which a company that is owed money by others signs over that owed amount to a lender in an effort to receive a loan based on its value. When individuals or companies owe money to a business, their accounts are referred to as “accounts receivable.” This means that the company can receive money for that account, which is owed for a product or service that was sold. A company can use assignment of accounts receivable to assign the payment of those accounts to another business, which lends the first company money based on this assignment.
While the procedure and language involved in an assignment of accounts receivable may seem complex, the entire process is fairly simple. It begins with a company that is owed money by other individuals or companies, usually due to a loan or sale of a product on credit. The accounts for the people or businesses that owe the company money are called “accounts receivable” because money is going to be received on those accounts. Assignment of accounts receivable refers to the process by which those accounts are “assigned” to another company as a form of collateral on a loan.
Basically, when a company wants to borrow money from another business, the company can use an assignment of accounts receivable to effectively promise to pay back the loan through incoming money on those accounts. If a company has three accounts receivable that will each pay $100 US Dollars (USD) in the future, then it might assign those accounts to a lender giving the company $250 USD. The total value of the assigned accounts is greater than the loaned amount, but this is considered a fair exchange as the company receives the loan immediately. As the assigned accounts receivable are paid back, the money is used to repay the loan for the company.
There are two secondary issues that can arise with assignment of accounts receivable. One issue is referred to as recourse which indicates the way in which the lender can regain money if a loan goes unpaid. An assignment of accounts receivable with recourse means that the lender includes a clause that allows it to demand the business pay back a loan in full, even if the accounts receivable do not pay the money they owe. This ensures that a lender receives compensation regardless of whatever may occur between the company receiving a loan and its customers.
Once a company is assigned accounts receivable, then it may contact those individuals or business with accounts it now has been assigned. The lender can have them sign a waiver that effectively excludes the lender from any issues that arise between the payer and the original owner of the account. This waiver often means that if the payer denies the owed money and gains legal protection from repaying the initial loan or credit, it may still need to be paid to the company assigned the account. Care should be taken by people whose accounts are assigned to another company, to ensure they know their rights.