What is an assignment of receivables?
Whenever we begin to explore a previously unfamiliar topic, there are important terms, without which understanding the whole issue is severely hampered, if not impossible. This is no different.
The dictionary meaning of the word assignment is the relinquishment of part or all of an individual’s rights to another person. In a situation where we have a right to a claim (for example, we are awaiting payment of an obligation from a counterparty), we can relinquish the right to the claim, giving it to the buyer. To this end, we enter into a contract of sale, donation, exchange or any other agreement with which the transfer of rights is clear.
In a contract of assignment of receivables, the parties are: the assignor – a.k.a. the creditor, i.e. the person who relinquishes rights to the receivable to another entity, and the assignee – the buyer of the receivable.
How does the process of assigning receivables work?
The entire process of transferring claims can be encapsulated in several steps.
- First, a situation must arise in which the assignor has a right to the claim. For example: company A invoices the other company for services rendered. From then on, a claim is created, which can then be assigned. The payment term for this particular claim is 45 days.
- After some time, it turns out that – for various reasons – waiting for the counterparty to pay the receivables is not to the liking of company A. As a result, the entrepreneur decides to assign the receivables to another entity.
- The companies interested in the assignment (Company A, which will become the assignor at the time of the agreement, and the buyer of the receivable, i.e. the assignee) agree on the details – for example, the type of agreement and the form of payment for the receivable.
- The next step is usually to inform the debtor of the situation – not a prerequisite, but a good practice, unless the contract specifies a prohibition on assignment (according to Art. 514 of the Civil Code). Conclusion of an assignment despite the explicit prohibition is fraught with the risk of nullity.
- An assignment agreement is then concluded. In theory, drafting it in writing is not necessary. It can even be concluded verbally, but in the vast majority of cases, Art. 511 of the Civil Code, which states that “if a claim is stated in writing, the transfer of that claim should also be stated in writing.” This agreement should state what type of receivables the assignment concerns, as well as the value of the assignment and the due date.
Assignment of receivables vs. factoring
The concepts of assignment of receivables and factoring are largely intertwined. Factoring service usually boils down to invoice financing, that is, just selling receivables to a factoring company for a certain price. Factoring allows you to regain or strengthen your company’s liquidity, since most of the amount arising from the receivables (up to 90%) is received immediately.
The permanent factoring service at PragmaGO involves compiling a list of contractors with whom we work and to whom we issue sales documents regularly and sending them to the factor. As a result, our company will receive transfers for invoices directly from the factoring company as soon as the sales document is issued.
In many factoring companies, it is possible to buy back a single invoice. All you have to do is apply online and then wait a few hours for the funds to be transferred. Each time you use a factoring service, you may actually be making an assignment of receivables. In this arrangement, the factor can also be called the assignee, while the factor becomes the de facto assignor.
PragmaGO’s factoring, however, comes in three forms: single invoice redemption, permanent online factoring, and financing for company purchases. Depending on the type of factoring chosen (and, consequently, the contract drawn up), the financial liability arrangements for the debtor’s insolvency may vary.
So what are the differences between assignment and factoring?
While carrying out an assignment of receivables makes a simple, one-time exchange, using factoring allows you to opt for a range of additional services. One of the additional services available in factoring, is the possibility of insuring receivables in case of debtor insolvency. Insurance can cover part or all of the amount. Another service we can choose on occasion, as it were, is monitoring of receivables – popular especially among small companies that do not have their own accounting department. The factoring company can also verify foreign counterparties at the request of the factor and assess their solvency and payment discipline.
