Details of an Assignment of Accounts Receivable

When customers purchase goods or services but don't pay for them right away, they are now in debt to the provider. The balance of this debt—what the customer owes—is called an account receivable. The collection of all the money from customers owed to your business are the accounts receivable.

If you borrow money, particularly as a business, the lender will ask you to provide security. Security is funds that the lender can access to recover the funds they lent (as well as any interest) if the borrower does not repay the loan. The lender may also ask you to sign other security agreements with your loan. These might be called general security agreements, indentures, pledges, or mortgages. Security agreements should be reviewed by a lawyer or other qualified professional you trust.

If a business frequently has accounts receivable and gives a lender security to borrow money, the lender will frequently insist that the borrower agrees to an accounts receivable assignment. Under the typical form of that agreement, if you do not repay the loan. The borrower has the right to directly collect the accounts receivable from your customers to pay off the loan and any interest owed.

Example of an Assignment of Accounts Receivable

Imagine you run a business that sells custom-built computers and similar hardware to businesses. You take an order from a customer for $50,000 worth of hardware with a $5,000 deposit. $45,000 is payable within 30 days after delivery. However, to acquire the hardware to complete the order, you have to use all of your operating capital. After delivering the hardware and the invoice for $45,000 to your client, you still have to pay rent and payroll in the amount of $25,000 before the date that the $45,000 invoice is due. When you approach your lender for a short-term loan, they require you to sign an assignment of that specific account receivable to receive the loan.

In an ideal scenario, you would pay the rent and payroll with the loan. The customer pays the $45,000 invoice, and you repay the loan. The assignment is discharged, the loan repaid, and everyone is happy. However, there might be a scenario where the customer doesn't pay on time, and you are unable to pay the loan back. In that case, the lender would exercise the assignment of the account receivable, and go directly to your customer and take the $45,000 owing. If there were excess funds over $25,000 and interest and costs incurred by the lender in recovering the funds, those would be returned to you.

Types of an Assignment of Accounts Receivable

There can be different types of assignments of accounts receivable. A very common form is a general assignment of accounts receivable. In this form, the lender is entitled to collect any accounts receivable that you might have at the time that you have failed to repay your loan.

A different form is a specific assignment of accounts receivable. Under this form, you would give the borrower a list of the amounts and customers that have accounts receivable that are being assigned. If you do not repay your loan, the borrower can only collect the accounts receivable that remain outstanding from those on the list that were specifically assigned.

There are other types of financing arrangements that a lender might agree to or propose. One of the more common ones is referred to as accounts receivable financing or "factoring." Under these types of arrangements, there is typically a purchase agreement under which the financing company actually purchases the accounts receivable from you and then directly collects the accounts receivable from your customers. The difference here is that the financing company assumes that the business may not collect the accounts receivable. They also take on the costs of the collection. The result is that these arrangements typically have more expensive rates and costs than a lending arrangement where you continue to bear the risk of collection.