accounts receivable assignment agreement

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Assignment of Accounts Receivable: Meaning, Considerations

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

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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, which could be as high as 100%, of the accounts receivable.

The borrower pays interest, a service charge on the loan, and the assigned receivables serve as collateral. If the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.

Key Takeaways

• 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.
• Usually, new and rapidly growing firms or those that cannot find traditional financing elsewhere will seek this method.
• Accounts receivable are considered to be liquid assets.
• If a borrower doesn't repay their loan, the assignment of accounts agreement protects the lender.

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 an "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. Often, companies that use it are unable to obtain less costly 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, like C2FO, are addressing this segment of the supply chain finance by creating marketplaces for account receivables. Liduidx is another Fintech company providing solutions through digitization of this process and connecting funding providers.

Financiers may be willing to structure accounts receivable financing agreements in different ways with various potential provisions.​

Special Considerations

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 relatively 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 they 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, a product of any financier.

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Accounts Receivable Assignment: Key Concepts and Business Impact

Explore the essential concepts and business impact of accounts receivable assignment, including cash flow effects and advanced techniques.

Efficient management of accounts receivable is crucial for maintaining a healthy cash flow in any business. Assigning these receivables can be an effective strategy to optimize liquidity and reduce financial risk.

Understanding the implications of this practice helps businesses make informed decisions that align with their financial goals.

Key Concepts of Accounts Receivable Assignment

Accounts receivable assignment involves transferring the rights to collect receivables from a business to a third party, often a financial institution. This practice is typically used to secure immediate cash flow, allowing businesses to meet short-term obligations without waiting for customer payments. The third party, known as the assignee, then assumes the responsibility of collecting the receivables.

One of the primary concepts in accounts receivable assignment is the distinction between recourse and non-recourse agreements. In a recourse agreement, the business retains some liability if the receivables are not collected, meaning they may need to compensate the assignee for any uncollected amounts. Conversely, a non-recourse agreement transfers the full risk of non-payment to the assignee, providing the business with greater financial security but often at a higher cost.

Another important aspect is the discount rate applied by the assignee. This rate reflects the cost of the service and the perceived risk associated with the receivables. Factors influencing the discount rate include the creditworthiness of the customers, the average collection period, and the overall economic environment. Businesses must carefully evaluate these rates to ensure that the benefits of immediate cash flow outweigh the costs.

Impact on Cash Flow

The assignment of accounts receivable can significantly influence a company’s cash flow dynamics. By converting receivables into immediate cash, businesses can bridge the gap between sales and actual cash inflows. This immediate liquidity can be particularly beneficial for companies facing seasonal fluctuations or those in industries with extended payment terms. For instance, a manufacturing firm might use receivable assignment to ensure it has the necessary funds to purchase raw materials, even if its customers take months to pay their invoices.

Moreover, the infusion of cash from receivable assignments can enable businesses to capitalize on growth opportunities. With more liquid assets on hand, companies can invest in new projects, expand operations, or take advantage of bulk purchasing discounts. This proactive approach to cash management can lead to increased profitability and a stronger market position. For example, a retail business might use the funds from assigned receivables to open new store locations, thereby increasing its market reach and revenue potential.

However, it’s important to recognize that while receivable assignment can provide immediate financial relief, it also comes with costs. The discount rate applied by the assignee reduces the total amount of cash received compared to the face value of the receivables. This reduction must be carefully weighed against the benefits of improved cash flow. Additionally, businesses must consider the potential impact on customer relationships, as the assignee will now be responsible for collections. Ensuring that the assignee maintains a professional and courteous approach is essential to preserving customer goodwill.

Accounting Treatment and Reporting

When it comes to the accounting treatment and reporting of accounts receivable assignments, businesses must adhere to specific guidelines to ensure accurate financial statements. The first step involves recognizing the assignment transaction in the accounting records. This typically requires debiting a cash account to reflect the immediate influx of funds and crediting the accounts receivable account to remove the assigned receivables from the company’s books. The difference between the receivables’ face value and the cash received, often due to the discount rate, is recorded as a financing expense or loss.

Proper disclosure is another critical aspect of accounting for receivable assignments. Financial statements must clearly indicate the nature and extent of the receivables assigned, including any recourse obligations if applicable. This transparency helps stakeholders understand the company’s financial position and the potential risks associated with the assigned receivables. For instance, notes to the financial statements should detail the terms of the assignment agreement, the discount rate applied, and any contingent liabilities that may arise from recourse provisions.

Additionally, businesses must consider the impact of receivable assignments on their financial ratios. Metrics such as the current ratio, quick ratio, and accounts receivable turnover can be significantly affected by the removal of receivables from the balance sheet. Analysts and investors often scrutinize these ratios to assess a company’s liquidity and operational efficiency. Therefore, it is essential to provide context and explanations for any substantial changes in these metrics due to receivable assignments.

Advanced Techniques in Receivable Assignment

Advanced techniques in receivable assignment can offer businesses more sophisticated ways to manage their cash flow and financial risk. One such technique is the use of securitization, where receivables are pooled together and sold as securities to investors. This method not only provides immediate liquidity but also diversifies the risk among multiple investors, making it an attractive option for companies with large volumes of receivables. Securitization can be particularly beneficial for industries like telecommunications or utilities, where customer bases are extensive and receivables are substantial.

Another advanced approach is dynamic discounting, which allows businesses to offer early payment discounts to their customers in exchange for quicker cash inflows. Unlike traditional discounting, dynamic discounting uses a flexible rate that can change based on the timing of the payment. This technique leverages technology platforms to automate and optimize the discounting process, ensuring that businesses can maximize their cash flow without sacrificing too much revenue. For example, a software company might use dynamic discounting to encourage its clients to pay invoices within 10 days instead of the standard 30, thereby improving its liquidity.

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• Receivables
• Notes Receivable
• Credit Terms
• Cash Discount on Sales
• Accounting for Bad Debts
• Bad Debts Direct Write-off Method
• Bad Debts Allowance Method
• Bad Debts as % of Sales
• Bad Debts as % of Receivables
• Recovery of Bad Debts
• Accounts Receivable Aging
• Assignment of Accounts Receivable
• Factoring of Accounts Receivable

Assignment of accounts receivable is an agreement in which a business assigns its accounts receivable to a financing company in return for a loan. It is a way to finance cash flows for a business that otherwise finds it difficult to secure a loan, because the assigned receivables serve as collateral for the loan received.

By assignment of accounts receivable, the lender i.e. the financing company has the right to collect the receivables if the borrowing company i.e. actual owner of the receivables, fails to repay the loan in time. The financing company also receives finance charges / interest and service charges.

It is important to note that the receivables are not actually sold under an assignment agreement. If the ownership of the receivables is actually transferred, the agreement would be for sale / factoring of accounts receivable . Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.

The assignment of accounts receivable may be general or specific. A general assignment of accounts receivable entitles the lender to proceed to collect any accounts receivable of the borrowing company whereas in case of specific assignment of accounts receivable, the lender is only entitled to collect the accounts receivable specifically assigned to the lender.

The following example shows how to record transactions related to assignment of accounts receivable via journal entries:

On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a 12% one month note payable. The bank charged 1% initial fee. Company A assigned $73,000 of its accounts receivable to the bank as a security. During March 20X6, the company collected $70,000 of the assigned accounts receivable and paid the principle and interest on note payable to the bank on April 1. $3,000 of the sales were returned by the customers.

Record the necessary journal entries by Company A.

Journal Entries on March 1

Initial fee = 0.01 × 50,000 = 500

Cash received = 50,000 – 500 = 49,500

The accounts receivable don't actually change ownership. But they may be to transferred to another account as shown the following journal entry. The impact on the balance sheet is only related to presentation, so this journal entry may not actually be passed. Usually, the fact that accounts receivable have been assigned, is stated in the notes to the financial statements.

Journal Entries on April 1

Interest expense = 50,000 × 12%/12 = 500

by Irfanullah Jan, ACCA and last modified on Oct 29, 2020

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Assignment of Accounts Receivable – Trap for the Unwary

By  Steven A. Jacobson

Most businesses are familiar with the mechanics of an assignment of accounts receivable. A party seeking capital assigns its accounts receivable to a financing or factoring company that advances that party a stipulated percentage of the face amount of the receivables.

The factoring company, in turn, sends a notice of assignment of accounts receivable to the party obligated to pay the factoring company’s assignee, i.e. the account debtor. While fairly straightforward, this three-party arrangement has one potential trap for account debtors.

Most account debtors know that once they receive a notice of assignment of accounts receivable, they are obligated to commence payments to the factoring company. Continued payments to the assignee do not relieve the account debtor from its obligation to pay the factoring company.

It is not uncommon for a notice of assignment of accounts receivable to contain seemingly innocuous and boilerplate language along the following lines:

Please make the proper notations on your ledger and acknowledge this letter and that invoices are not subject to any claims or defenses you may have against the assignee.

Typically, the notice of assignment of accounts receivable is directed to an accounting department and is signed, acknowledged and returned to the factoring company without consideration of the waiver of defenses languages.

Even though a party may have a valid defense to payment to its assignee, it still must pay the face amount of the receivable to the factoring company if it has signed a waiver. In many cases, this will result in a party paying twice – once to the factoring company and once to have, for example, shoddy workmanship repaired or defective goods replaced. Despite the harsh result caused by an oftentimes inadvertent waiver agreement, the Uniform Commercial Code validates these provisions with limited exceptions. Accordingly, some procedures should be put in place to require a review of any notice of assignment of accounts receivable to make sure that an account debtor preserves its rights and defenses.

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The Difference Between Assignment of Receivables & Factoring of Receivables

You can raise cash fast by assigning your business accounts receivables or factoring your receivables. Assigning and factoring accounts receivables are popular because they provide off-balance sheet financing. The transaction normally does not appear in your financial statements and your customers may never know their accounts were assigned or factored. However, the differences between assigning and factoring receivables can impact your future cash flows and profits.

How Receivables Assignment Works

Assigning your accounts receivables means that you use them as collateral for a secured loan. The financial institution, such as a bank or loan company, analyzes the accounts receivable aging report. For each invoice that qualifies, you will likely receive 70 to 90 percent of the outstanding balance in cash, according to All Business. Depending on the lender, you may have to assign all your receivables or specific receivables to secure the loan. Once you have repaid the loan, you can use the accounts as collateral for a new loan.

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Using your receivables as collateral lets you retain ownership of the accounts as long as you make your payments on time, says Accounting Coach. Since the lender deals directly with you, your customers never know that you have borrowed against their outstanding accounts. However, lenders charge high fees and interest on an assignment of accounts receivable loan. A loan made with recourse means that you still are responsible for repaying the loan if your customer defaults on their payments. You will lose ownership of your accounts if you do not repay the loan per the agreement terms.

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How Factoring Receivables Works

When you factor your accounts receivable, you sell them to a financial institution or a company that specializes in purchasing accounts receivables. The factor analyzes your accounts receivable aging report to see which accounts meet their purchase criteria. Some factors will not purchase receivables that are delinquent 45 days or longer. Factors pay anywhere from 65 percent to 90 percent of an invoice's value. Once you factor an account, the factor takes ownership of the invoices.

Factoring Strengths and Weaknesses

Factoring your accounts receivables gives you instant cash and puts the burden of collecting payment from slow or non-paying customers on the factor. If you sell the accounts without recourse, the factor cannot look to you for payment should your former customers default on the payments. On the other hand, factoring your receivables could result in your losing customers if they assume you sold their accounts because of financial problems. In addition, factoring receivables is expensive. Factors charge high fees and may retain recourse rights while paying you a fraction of your receivables' full value.

• All Business: The Difference Between Factoring and Accounts Receivable Financing

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Home > Accounts Receivable > Assignment of Accounts Receivable Journal Entries

Assignment of Accounts Receivable Journal Entries

The assignment of accounts receivable journal entries below act as a quick reference, and set out the most commonly encountered situations when dealing with the double entry posting of accounts receivable assignment.

The assignment of accounts receivable journal entries are based on the following information:

• Accounts receivable 50,000 on 45 days terms
• Assignment fee of 1% (500)
• Initial advance of 80% (40,000)
• Cash received from customers 6,000
• Interest on advances at 9%, outstanding on average for 40 days (40,000 x 9% x 40 / 365 = 395)

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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December 5, 2014 by Comitz, Stanley & Funk -->

Anatomy Of The Asset Purchase Agreement Part 2: Accounts Receivable

In our previous post in this series, we looked at the allocation of the purchase price between equipment, goodwill and non-competes.  In this post, we examine the treatment of accounts receivable in the sale of a practice.

The importance of accounts receivable to an asset purchase agreement often depends on the type of practice you have.  If you have a fee-for-service practice where your patients pay upfront for all of the work you will do, accounts receivable may not be a significant part of the transaction.  However, if you accept payment over time, or some or all of your practice is insurance-based, then you will often carry significant receivable balances that must be accounted for in the asset purchase agreement.  Although there can be variations, there are two ways general ways in which receivables are treated in asset purchase agreements:

The Buyer Assumes The Receivables As Part Of The Purchase Price

One option you can choose is to simply include the accounts receivable as part of the purchase price.  If you are selling your practice, this is often the favored option because you will not have to worry about collecting from patients or insurance companies.  However, one drawback is that the buyer will often discount the amount of the receivables, since he will have to wait for the payment, and may not be able to collect all of the outstanding balance.

If you are buying a practice, there are some benefits as well.  You can immediately improve the cash flow of the practice by purchasing the receivables in the asset purchase agreement, since you will not have to wait until the post-closing services are performed, billed and paid to start receiving payment.  Depending on the amount of a discount you are able to negotiate with the seller, you can also potentially make a quick profit, if the receivables pay more than the discounted purchase price.

However, trying to collect on someone else’s receivables can be cumbersome.  In order for you to collect, the seller will have to execute an assignment agreement and you will have to contact all of the parties who owe the seller money to inform them of the assignment.  Health insurers may also have company-specific forms they will require in order to process the assignment, and it can be a bureaucratic nightmare to ensure that the correct form is submitted to the correct insurer so that you can receive payment.

Also, including accounts receivable as part of the asset purchase agreement can lead to unwanted tension, and possibly litigation, between the buyer and the seller.  There is the risk that some of the payors will continue to pay the seller, instead of the buyer, leading to disputes over the after-closing payments.  Additionally, if the buyer is not as successful in collecting the receivables as anticipated, there can be claims of fraud or misrepresentation made against the seller.  There is also the possibility that patients may dispute charges because of the work performed by the seller, a topic which will be addressed in more detail in a future blog post on Work in Progress.

The Seller Retains The Receivables After Closing

If you are buying a practice and do not want to go through the logistical hurdles of trying to track down the seller’s receivables, you can simply exclude receivables entirely from the asset purchase agreement and adjust the purchase price accordingly.  This will leave the seller responsible for collecting the outstanding payments for all services performed prior to the closing date, and allow you to focus on building the practice, rather than chasing old debts.

If you are selling your practice, and especially if you are selling because of retirement or disability, collecting receivables after the closing date may be an inconvenience you do not want to deal with.  However, there are some benefits to this approach.  One benefit is that it will provide post-closing income, likely for a higher amount than if receivables are included in the asset purchase agreement.  Another is that you will avoid potential disagreements or litigation with the buyer over the receivables.

Finally, there may be tax benefits in excluding the receivables from the sale, especially if the closing for the asset purchase agreement is at or near the end of your tax year.  Receivables are generally taxed as ordinary income, but you can decrease your effective tax rate on the receivables if they fall in a different tax year than when the practice is actually sold.  Therefore, if you sell your practice for a net gain of $600,000, including receivables, in 2014, your effective tax rate may be higher than if you sell the practice for a net gain of $500,000, excluding receivables, in 2014 and collect $120,000 in receivables in 2015. [1]

Some Factors To Consider

There are pros and cons to both approaches, for both sides of the transaction.  In determining whether to include receivables and how to structure them in the asset purchase agreement, you should address the following questions:

• Payment history . What has been the seller’s track record in collecting the receivables, and how long has it taken him, on average, to collect?  If it takes a long time for the seller to collect, or if he writes off a lot of collections, the buyer will be less inclined to include receivables and will demand a greater discount.
• Collection percentage . How much should the discount be for the outstanding receivables?  Most asset purchase agreements will allocate different percentages for receivables based on age.  For example, receivables less than 30 days old may be paid at 90%, 30-60 days old might pay 75%, and so on.
• Tax implications . Is there a potential tax savings if the receivables are excluded from the asset purchase agreement?  If so, there may be an incentive for the seller to exclude them from the practice.
• Trust between the parties . Is there open and honest communication between the buyer and seller, with full disclosure in the negotiation process?  If so, then there is a lower, but still present, risk of future litigation down the road.

Of course, this is just a broad overview of some of the issues that can arise with accounts receivable, and every transaction is unique.  Whether you are buying or selling a practice, you should consult with an experienced advisor to guide you through how best to structure the transaction.

[1] Assuming that you do not have any other taxable income in 2015.

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Assignment of Accounts Receivable: Definition, Benefits, and Emerging Trends

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What is assignment of accounts receivable, how does assignment of accounts receivable work, what are some special considerations for assignment of accounts receivable, emerging trends in assignment of accounts receivable, fintech solutions.

• Access to immediate cash flow
• Allows businesses to leverage their accounts receivable
• May be available to companies with limited credit history or poor credit
• Provides an alternative financing option when traditional loans are not available
• Helps businesses manage cash flow fluctuations
• Higher cost compared to traditional financing options
• Interest rates and service charges can be substantial
• May indicate financial distress to stakeholders
• Loss of control over customer relationships and collections process
• Defaulting on the loan can result in loss of assets

Frequently asked questions

How does assignment of accounts receivable differ from factoring, can any business use assignment of accounts receivable, what happens if a customer defaults on payment, is assignment of accounts receivable a sign of financial distress, what are the eligibility criteria for assignment of accounts receivable, how does assignment of accounts receivable affect financial statements, are there any alternatives to assignment of accounts receivable, how can businesses mitigate the risks associated with assignment of accounts receivable, key takeaways.

• Assignment of accounts receivable allows businesses to access immediate cash flow by leveraging their outstanding invoices.
• While it provides an alternative financing option, it can be costly compared to traditional loans.
• Fintech companies are transforming the accounts receivable financing market with innovative digital solutions.
• Businesses should carefully evaluate the terms and implications of assigning their accounts receivable before entering into agreements with lenders.

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Factoring Agreements Details (Including 7 Sample Contracts)

More about factoring.

• Factoring Services
• How to Qualfify For Factoring
• Factoring Costs
• Invoice Factoring Advances

You are in the right place if you are looking for the definition of factoring agreements, examples, and the most common terms included in these contracts.

If you instead got to this page looking for information about finance factoring services or are trying to get a proposal and potentially sign an agreement, please  request a quote  or contact us at 1-855-424-2955. Our managing director will take care of your needs right away.

In this detailed article, you’ll get information about the following subjects:

• Factoring Agreement Definition
• Typical Clauses & Security Terms
• Seven Real Examples of Factoring Agreements
• Frequent Questions

Important   Disclaimer : This is an informational article, and we are not providing legal advice. We strongly suggest you consult an attorney before signing any contract.

What is a Factoring Agreement?

A factoring agreement is a financial contract that regulates the relationship between a factoring company and a client for the provision of invoice factoring services. These agreements define the financial obligations and rights between parties.

The invoice factoring process involves the purchase of outstanding invoices at a discount in exchange for advanced funding.

Typical Terms Included in a Factoring Contract

In this section, you can find widely used factoring terms and conditions included in factoring contracts.

Please be aware that these are not necessarily the terms included in our contracts. Conditions vary from factor to factor, and our intention in this article is to detail the most widely found in the industry.

Purchase Price and Advance Rates

Each invoice’s purchase price is calculated by taking the original invoice’s face value and deducting all the discounts the client offers to the debtor.

The advance is a percentage (rate) of the purchase price of outstanding invoices sold. That percentage multiplied by the purchase price is the upfront cash the client receives at the time of the accounts receivable purchase transaction.

This money received upfront is not the total cash the client gets. The financial institution sends the difference between the purchase price and the advance minus fees and required reserve amounts to the customer when the debtor pays.

Advance rates, typically from 60% to 99%, tend to depend on the industry to which the client belongs. Here, you can find more information about  factoring advances and their calculation .

Most contracts, especially the full recourse ones, authorize the factor to require and maintain a reserve amount. The factoring company holds this reserve as cash collateral to protect its interests if payments cannot be collected or other possible disputes arise. The collected amounts exceeding the required reserve amount are released to the client on an ongoing basis, typically once a week on a pre-agreed day.

Credit Facility & Customer Limits

Accounts receivable purchase minimums.

Contracts typically stipulate minimum purchases. These thresholds consist of a minimum monthly volume of sales that the client agrees to factor.

Facility Limits

After credit checks and analysis, based on debtors’ credit risk assessment, factors establish maximum purchase amounts and facility line limits. At its discretion, the factor can adjust these limits to support the client’s growing funding needs.

Costs of Invoice Factoring

Factors get commissions and fees in compensation for their invoice advance services. The costs of factoring usually consist of two types of charges: a discount fee based on the value of the invoices purchased and other miscellaneous fees to cover administrative expenses or as penalties for not reaching milestones or complying with obligations agreed on in the contract.

Factoring Fees

These are the commissions that a client pays based on the face value of invoices sold. These factoring fees are calculated by applying a factoring rate (or discount rate) on either the purchase price or the amount advanced.

The discount rate definition varies from factor to factor. Here are some examples of factoring rate structures that you may find:

• A variable rate based on The Wall Street Journal’s published Prime Rate plus some additional discount is charged for every day the money is advanced.
• A fixed percentage is calculated on the invoice amount and charged every 30, 20, or 10 days or any other combination.
• In some specific cases, particularly in the transportation industry, some factors charge a fixed percentage of the invoice value, no matter the days it takes to collect the invoice (within some limits).

You can find detailed  information about factoring rates and discount fees here .

Other Miscellaneous Fees

These fees vary widely from factor to factor, and you may find different names for similar costs.

Some factors tend to charge much higher factoring fees and discount rates (mentioned in the section above) and fewer miscellaneous fees. Others have lower factoring rates but more of these fees in their contracts. You need to make numbers considering all costs before deciding what deal is the best for your business.

Some fees cover administrative expenses and activities, like widespread processing, administration, set-up, wire, or facility fees.

Others, such as reserve shortage fees, misdirected payment, and termination fees, are penalties when the client doesn’t comply with some agreed terms.

Other Miscellaneous Receivable Factoring Terms

Receivables purchase agreement initial term and renewals.

All contracts include a clause defining the length of the initial term, and typically, most also include auto-renewal provisions. It is common to require the clients to communicate by certified written notice, at least a month or two before the renewal date, that they don’t want to renew the service.

Initial Funding

Some factoring companies deduct required reserve amounts and set-up fees from the initial funding.

Collections By Seller

Under a contract, sellers are not authorized to collect payments from debtors. If this happens, some clauses define the process the client must follow to send the amounts to the factor and penalties if the required steps are not obeyed.

Security Collateral

All contracts have security agreement terms demanding collateral to secure the payment of amounts owed and compliance with other financial obligations by the seller. The client has to agree to grant the factor the right to file a lien on the business assets. This lien is a first-priority security interest against losses and is formalized as a UCC Filing (Uniform Commercial Code). Business assets include but are not limited to, accounts and current invoices, chattel paper, inventory, equipment, furniture, bank accounts, deposits, real estate, securities, contract rights, intellectual property, and other intangibles.

Most contracts include the obligation to notify debtors about the sale of the receivables. This notification is called a “Notice of Purchase” or a “Notice of Assignment.” You can find more information later in this document in the FAQ section.

Default and Remedies

All contracts include terms specifying remedies in the event of default. Default events may include but are not limited to:

• The client does intentional debt collections.
• Failure by the client to provide financial information when required.
• The seller becomes insolvent or files for bankruptcy.
• Any fraudulent activities performed by the client.
• Failure by the client to notify the factor about disputes with debtors.
• Client failure to pay taxes.
• Any other client failure regarding compliance with the obligations agreed.
• The client refuses to continue the relationship before the agreed initial or renewed period has passed.

Penalties in the Event of Default

In the event of default, the factor may choose to terminate the agreement and, in some situations, take other steps allowed by the contract to collect amounts owed.

Termination Fees

When an agreement is terminated, the factor will try to collect all the fees and advanced amounts due. It will also charge a termination fee if the contract period has not expired or the client has not fulfilled other obligations.

All contracts include terms defining steps to follow in disputes between the parties, the State governing laws that apply, the courts to be used in case of a lawsuit, and who is required to pay for attorney fees.

Clauses Specific to Some Types of Factoring Contracts

Usually, terms vary depending on whether the service is provided on a full or non-recourse basis.

Accounts receivable factoring agreements with recourse contain clauses explaining what happens when the factor cannot collect purchased invoices within a defined period. In this situation, the client must pay back the invoice amount(usually a charge-back) and recourse fees.

Non-recourse factoring agreements may require the client to get credit insurance.

Seven Sample Business Factoring Agreements

As promised earlier, here are some real examples of factoring contracts. (Click to download PDF files)

• Most Industries – Full Recourse
• Most Industries – Full Recourse II
• Most Industries – Full Recourse III
• Services – Full Recourse
• Transportation/ Trucking – Full Recourse
• Transportation/ Trucking – Full Recourse II
• Transportation / Trucking – Non-recourse
• Extra Bonus from a web source

If you want an example of our typical contract, please  contact us  or call 1-855-424-2955.

Frequently Asked Questions

Are factoring agreements templates.

Even when some clauses are similar among factoring companies, the factoring industry does not have standard contracts. With corporate attorneys’ help, each factor develops its unique contract customized to its desired terms and conditions. These documents are usually modified to fit each client.

It’s improbable to find an invoice factoring agreement template used by multiple companies.

How to get out of a factoring contract?

Factoring arrangements include termination provisions, and you can terminate your contract anytime. But, before you do it, we recommend you consult your attorney and carefully read your termination rights and obligations.

As long as there are no disputes, you can usually exit the agreement when the initial period or renewal periods agreed have expired, all the factored accounts are collected, and all the owed fees are paid. At that time, the factor releases the balance of the reserve account.

Exit termination of a factoring agreement is not that simple if your agreed initial contract term or renewal time has not passed. In this case, you may typically have to pay administration fees and penalties, such as termination fees. You won’t easily be able to get out of a contract if any dispute exists or if there are unpaid invoices or due charges.

What happens with a factoring agreement in bankruptcy procedures?

The way bankruptcy affects a factoring arrangement depends on the time of the Chapter 11 filing.

If your company signed a factoring agreement before bankruptcy and has already been factoring invoices, the effects will depend on the terms defined in your contract:

• Some factors may agree to continue the relationship if you have creditworthy debtors, typically after collecting a DIP fee.
• If instead, the factor is convinced about your company or your debtors’ financial inability to pay, it may terminate the contract after collecting liquidation fees.

Suppose your company is ready to file for bankruptcy or is already in Chapter 11 when you are looking for factoring services. In that case, some companies like ours may be willing to offer to finance and will work with your counsel to arrange a DIP financing facility.

We provide debtor-in-possession factoring services to B2B companies in bankruptcy. Here, you can find more  information about DIP Financing .

What is a Notice of Assignment in a factoring arrangement?

An “NOA” or “Notice of Assignment” is a written communication sent to business owners (client’s debtors) informing them that the factoring company now owns the receivables. It also instructs the debtor to submit payments to the factor instead of the vendor.

Do factoring companies charge origination fees?

No, origination fees are charged when loans are issued, and as explained in the previous question, invoice factoring is not a loan.

Would You Like Personalized Information?

If you would like to talk to our managing director about our receivables purchase services and get a proposal with customized business terms for your company, please call 1-855-424-2955. We serve a wide variety of industries.

Author Analia Miguel

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• How invoice factoring works
• About Gateway Commercial Finance

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Assignment of Accounts Receivables and Factoring Agreements in the Construction Industry: How Can They Affect an Owner/Developer's Project?

It is not uncommon that companies with cash flow problems or those that have a desire to be paid on expedited terms assign their accounts receivables as collateral for a secured loan or they factor them. This can happen in any industry. What impacts can this have on a construction project when a contractor or vendor assigns or factors its accounts receivable?

First let's understand the difference between the two routes a contractor may take.

• In the case of assignment, the financial institution analyzes the accounts receivable aging report and for each invoice that qualifies the assignee generally receives between 50-85 percent of the outstanding balance in cash. Depending on the lender the contractor may have to assign all of the receivables or specific receivables to secure the loan. The benefit of this arrangement is that the contractor retains ownership of the accounts as long as the contractor makes loan payments and the lender deals directly with the contractor so customers may never know the contractor borrowed on their outstanding accounts.
• In the case of factoring, the contractor sells its accounts receivable to the financial institution or the factor. The factor analyzes the accounts receivable aging report to see which accounts meet their criteria. Factors will pay anywhere from approximately 65-90%. Factoring gives the contractor instant cash and puts the burden on collecting receivables on the factor. Factoring is generally expensive because the factoring companies charge high fees and they may retain recourse rights.

One may argue that a project owner or developer should not care whether a contractor assigns or factors their accounts receivable as long as they keep working. However, in the case of factoring especially, it can have an impact because the factor will require payment to be made directly to them. Presuming a project has a construction loan, the lender will not simply fund to an unknown company that has not been pre-approved by the lender. In addition, lenders and owners generally will not and should not make payments without receiving a lien waiver from the payee, which the factor may not be able to provide. If the lender will not fund, the contractor may have a basis to stop work which could delay the project.

This can be avoided, or at least discouraged, by having the proper language in the contract to prevent the assignment or the factoring. Most often the concern is the contractor assigning the agreement to another contractor which most contracts would adequately protect against by stating that the contract cannot be assigned without the consent of the owner. But sometimes that language is not enough because in both scenarios described above, the contract itself is not being assigned or sold, only the receivable.

Language such as: "Neither party to the Contract shall assign the Contract without written consent of the other" may not prevent a contractor from assigning the account receivable or factoring.

Broader, yet more specific language such as: "Contractor shall not assign or transfer its interest in this Contract or assign or transfer any right it may have under the same or the proceeds payable hereunder or any part hereof ..." not only prohibits assignment of the contract but certain interests in the contract which is better equipped to prevent against factoring. When assignees or factoring companies review the receivables they may consider contract language which expressly prohibits an assignment or factoring of the receivables which may keep your project out of such arrangements, which could impact your lender's funding and progress of the project.

Filed under

• Construction
• Tarter Krinsky & Drogin LLP

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