Assignment of Accounts Receivable
Contents
Exploring the World of Assignment of Accounts Receivable
Demystifying Assignment of Accounts Receivable: A Comprehensive Guide
Understanding the Basics
Assignment of accounts receivable serves as an alternative method of debt financing, allowing borrowers to leverage their outstanding invoices to secure loans from lending institutions. This lending agreement entails assigning accounts receivable to the lender in exchange for a loan, with the receivables serving as collateral.
Delving into the Details: How It Works
Key Insights
- Ownership Retention: Despite assigning accounts receivable to the lender, the borrower retains ownership and the associated risk. In the event of non-payment by customers, the lending institution may demand repayment directly from the borrower, termed as 'assignment of accounts receivable with recourse.'
- Cost Considerations: Assignment of accounts receivable is often viewed as a costly form of borrowing, with annual percentage rates (APRs) reaching as high as 100%. It is commonly sought by new or rapidly growing firms unable to secure traditional financing.
- Emerging Solutions: The rise of fintech startups like C2FO and Liduidx is reshaping the landscape of supply chain finance by providing innovative marketplaces and digitized solutions for accounts receivable financing.
Special Considerations: Understanding Accounts Receivable
Key Insights
- Liquidity and Value: Accounts receivable, representing outstanding invoice balances, are deemed relatively liquid assets. While they are reported as assets on a company's balance sheet, they may also pose challenges in terms of collections and immediate cash conversion.
- Factoring Dynamics: Assignment of accounts receivable is a subset of factoring, a financing practice where invoices are sold to factoring companies in exchange for immediate cash. Factoring companies specialize in accounts receivable financing, offering tailored solutions to meet the financing needs of businesses.