general assignment of receivables

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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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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 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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Receivables Finance And The Assignment Of Receivables

Tfg legal trade finance hub, receivables finance and the assignment of receivables.

A receivable represents money that is owed to a company and is expected to be paid in the future. Receivables finance, also known as accounts receivable financing, is a form of asset-based financing where a company leverages its outstanding receivables as collateral to secure short-term loans and obtain financing.

In case of default, the lender has a right to collect associated receivables from the company’s debtors. In brief, it is the process by which a company raises cash against its own book’s debts.

The company actually receives an amount equal to a reduced value of the pledged receivables, the age of the receivables impacting the amount of financing received. The company can get up to 90% of the amount of its receivables advanced.

This form of financing assists companies in unlocking funds that would otherwise remain tied up in accounts receivable, providing them with access to capital that is not immediately realised from outstanding debts.

FIG. 1: Accounts receivable financing operates by leveraging a company’s receivables to obtain financing.  Source: https://fhcadvisory.com/images/account-receivable-financing.jpg

Restrictions on the assignment of receivables – New legislation

Invoice  discounting  products under which a company assigns its receivables have been used by small and medium enterprises (SMEs) to raise capital. However, such products depend on the related receivables to be assignable at first.

Businesses have faced provisions that ban or restrict the assignment of receivables in commercial contracts by imposing a condition or other restrictions, which prevents them from being able to use their receivables to raise funds.

In 2015, the UK Government enacted the Small Business, Enterprise and Employment Act (SBEEA) by which raising finance on receivables is facilitated. Pursuant to this Act, regulations can be made to invalidate restrictions on the assignment of receivables in certain types of contract.

In other words, in certain circumstances, clauses which prevent assignment of a receivable in a contract between businesses is unenforceable. Especially, in its section 1(1), the Act provides that the authorised authority can, by regulations “make provision for the purpose of securing that any non-assignment of receivables term of a relevant contract:

• has no effect;
• has no effect in relation to persons of a prescribed description;
• has effect in relation to persons of a prescribed description only for such purposes as may be prescribed.”

The underlying aim is to enable SMEs to use their receivables as financing to raise capital, through the possibility of assigning such receivables to another entity.

The aforementioned regulations, which allow invalidations of such restrictions on the assignment of receivables, are contained in the Business Contract Terms (Assignment of Receivables) Regulations 2018, which will apply to any term in a contract entered into force on or after 31 December 2018.

By virtue of its section 2(1) “Subject to regulations 3 and 4, a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.”

Such regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are several exclusions to this rule.

In section 3, an exception exists where the supplier is a large enterprise or a special purpose vehicle (SPV). In section 4, there are listed exclusions for various contracts such as “for, or entered into in connection with, prescribed financial services”, contracts “where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession” or contracts “where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom”. Also, specific exclusions relate to contracts in energy, land, share purchase and business purchase.

Effects of the 2018 Regulations

As mentioned above, any contract terms that prevent, set conditions for, or place restrictions on transferring a receivable are considered invalid and cannot be legally enforced.

In light of this, the assignment of the right to be paid under a contract for the supply of goods (receivables) cannot be restricted or prohibited. However, parties are not prevented from restricting other contracts rights.

Non-assignment clauses can have varying forms. Such clauses are covered by the regulations when terms prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.

Overall, these legislations have had an important impact for businesses involved in the financing of receivables, by facilitating such processes for SMEs.

Digital platforms and fintech solutions: The assignment of receivables has been significantly impacted by the digitisation of financial services. Fintech platforms and online marketplaces have been developed to make the financing and assignment of receivables easier.

These platforms employ tech to assess debtor creditworthiness and provide efficient investor and seller matching, including data analytics and artificial intelligence. They provide businesses more autonomy, transparency, and access to a wider range of possible investors.

Securitisation is an essential part of receivables financing. Asset-backed securities (ABS), a type of financial instrument made up of receivables, are then sold to investors.

Businesses are able to turn their receivables into fast cash by transferring the credit risk and cash flow rights to investors. Investors gain from diversification and potentially greater yields through securitisation, while businesses profit from increased liquidity and risk-reduction capabilities.

References:

https://www.tradefinanceglobal.com/finance-products/accounts-receivables-finance/  – 28/10/2018

https://www.legislation.gov.uk/ukpga/2015/26/section/1/enacted  – 28/10/2018

https://www.legislation.gov.uk/ukdsi/2018/9780111171080  – 28/10/2018

https://www.bis.org/publ/bppdf/bispap117.pdf  – Accessed 14/06/2023

https://www.investopedia.com/terms/a/asset-backedsecurity.asp  – Accessed 14/06/2023

https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf  – Accessed 14/06/2023

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Assignment of Accounts Receivable

The financial accounting term assignment of accounts receivable refers to the process whereby a company borrows cash from a lender, and uses the receivable as collateral on the loan. When accounts receivable is assigned, the terms of the agreement should be noted in the company's financial statements.

Explanation

In the normal course of business, customers are constantly making purchases on credit and remitting payments. Transferring receivables to another party allows companies to reduce the sales to cash revenue cycle time. Also known as pledging, assignment of accounts receivable is one of two ways companies dispose of receivables, the other being factoring.

The assignment process involves an agreement with a lending institution, and the creation of a promissory note that pledges a portion of the company's accounts receivable as collateral on the loan. If the company does not fulfill its obligation under the agreement, the lender has a right to collect the receivables. There are two ways this can be accomplished:

General Assignment : a portion of, or all, receivables owned by the company are pledged as collateral. The only transaction recorded by the company is a credit to cash and a debit to notes payable. If material, the terms of the agreement should also appear in the notes to the company's financial statements.

Specific Assignment : the lender and borrower enter into an agreement that identifies specific accounts to be used as collateral. The two parties will also outline who will attempt to collect the receivable, and whether or not the debtor will be notified.

In the case of specific assignment, if the company and lender agree the lending institution will collect the receivables, the debtor will be instructed to remit payment directly to the lender.

The journal entries for general assignments are fairly straightforward. In the example below, Company A records the receipt of a $100,000 loan collateralized using accounts receivable, and the creation of notes payable for $100,000.

In specific assignments, the entries are more complex since the receivable includes accounts that are explicitly identified. In this case, Company A has pledged $200,000 of accounts in exchange for a loan of $100,000.

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UAE clarifies factoring and assignments of receivables

The recently enacted Federal Decree-Law No. 16 of 2021 on Factoring and Transfer of Civil Accounts Receivable (the New Law) which enters into force on 8 December 2021, being the first federal regulation in the United Arab Emirates (the UAE) dealing specifically with factoring and the assignment of receivables, has ushered in some much-needed clarity as to how these arrangements should work in the UAE. Specifically, the New Law provides a new regulatory framework which sets out the basic legal requirements for assignments and transfers of receivables, validity and perfection requirements, as well as the rules for determining priority amongst competing claims over assigned receivables.

Historically, this had been viewed as something of a 'grey' area of the law – governed in a piecemeal way, with Federal Law No. 5 of 1985 (as amended, the Civil Code) governing the assignment of debt and Federal Law No. 4 of 2020 (the Moveable Assets Mortgage Law) governing assignments over receivables which are taken by way of security. This had created some uncertainty as to which regulation should apply in particular circumstances, as well as uncertainty regarding the relationship between the different laws. The fact that the New Law seeks to provide a unified framework in relation to this area is a very welcome development. There are, however, certain key aspects of the New Law which may require further clarification as market participants seek to rely upon this new framework.

Scope of the New Law

The New Law applies broadly to any assignment of receivables made as part of commercial or civil transactions. Notable exclusions from this new law are assignments in the context of:

• personal / family transactions;
• financial contracts regulated by clearing agreements;
• foreign exchange transactions;
• interbank payment systems, net-based clearing systems and settlement related to securities, assets or other financial instruments;
• repurchase of securities, assets or financial instruments deposited with a broker;
• the right to financial payments fixed in endorsable bonds;
• the right to payments deposited in credit accounts with banks; and
• the right to payments under securities, documentary credits and letters of guarantee.

What is an Assignment?

The New Law governs " Assignments ", which is defined to cover an arrangement where " contractual rights to settle a cash sum owed by the Debtor are transferred to the Assignee, and the Assignment constitutes the agreement to create a security right on the Debtor's debt, transfer it as a security, and sell it in a final sale ". One possible interpretation of this particular definition would be that the New Law only governs arrangements which not only assign a debt but which also create a security interest over that debt. However, many factoring arrangements and debt assignments simply involve a debt being assigned absolutely and do not necessarily involve a security right being created over that debt. The New Law also does not elaborate on the different types of factoring arrangements that can exist, such as the purchase or sale of receivables, discounting and reverse factoring.

Given that the New Law appears (on the face of it) to be intended to cover all factoring arrangements and assignments of debts, the prudent course of action for market participants would be to ensure that all of their factoring arrangements and assignments of debt comply with the New Law, regardless of whether those arrangements involve security being created.

Form of Assignment

When it comes to the form that an assignment of receivables should take, the New Law is not prescriptive, and simply provides that an assignment shall be considered effective provided that the receivables that are subject to the assignment are described in a general or specific manner in order to allow for their identification.

Importantly, the New Law goes on to clarify some of the key points around how to describe the receivables being assigned (in relation to which there previously was some uncertainty). Specifically, we highlight the following:

• It is acceptable for the purposes of the New Law to describe the assigned receivables generally, for example by simply saying that the assignment is of all receivables that are currently owed by a debtor, all receivables that will be owed by a debtor in the future, or a specific class or specific or general type of such receivables.
• The New Law therefore appears to confirm that, in an assignment agreement, it is not necessary to individually list out each particular contract under which a debt is assigned.
• The New Law confirms that if the subject of the relevant assignment is receivables which are owed by a debtor in the future, then that assignment may be effective without the need to enter into any new transaction to assign each future debt in due course.

Effectiveness and Priority

One key point which the New Law clarifies is in relation to the effectiveness of debt assignment agreements against third parties: with specific provisions of the Moveable Assets Mortgage Law being incorporated by reference in order to establish that such assignments, in order to be effective towards third parties, must be declared on the electronic register created under the Moveable Assets Mortgage Law (which is currently operated by the Emirates Integrated Registries Company (EIRC)). While, prior to the introduction of the New Law, it was common for market participants to register assignments of receivables with the EIRC, it was not previously clear whether this was strictly necessary with respect to absolute assignments of receivables under the Civil Code which did not create security interests.

Regarding any specific requirements which need to be met in order for an assignment of receivables to be effective against a debtor (which have traditionally been governed by the Civil Code and relevant cases), the New Law does not specifically repeal or replace the Civil Code in this respect, and so the prudent course would be for market participants to continue to satisfy the applicable conditions derived from the Civil Code. This essentially means that, in order for an assignment of receivables to be enforceable against a debtor, notice of the assignment is required to be provided to the relevant debtor and (depending on the exact circumstances) with it also being advisable for the assignment of receivables to be acknowledged by the relevant debtor. The New Law does however give an assignee the clear right to send a notification and payment instructions to the relevant debtor in relation to receivables that have been assigned to that assignee (even if that notification gives rise to a breach of the underlying contract as between the assignor and the debtor), and does also seem to indicate that the debtor must agree to the assignment particularly in the context where the underlying contract is being amended.

Similar to what we see with registration, when it comes to determining priority among competing claims over receivables, the New Law relies on the Moveable Assets Mortgage Law to allocate the priority (determined by the date and time of registration) of the rights of assignees over the accounts receivable, to determine the priority of the assignor's obligation and to determine the priority of the assignment towards non-contractual rights.

To conclude, the New Law has clarified certain key issues regarding the assignment of receivables, and in doing so has created a more unified framework. It is now clear that any receivables which are subject to an assignment (which may include future receivables) need only be described in the assignment in general terms, and it is also now clear that certain elements of the Moveable Assets Mortgage Law apply to assignments of receivables (such as the registration requirements and rules regarding priority). Question marks do, however, remain over how the New Law treats certain types of debt assignments and factoring arrangements (particularly ones that involve absolute assignments and not security rights), as well as the question of how a court would interpret the relevant provisions of the Civil Code in light of the New Law.

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Pledging Accounts Receivable

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on January 30, 2024

Fact Checked

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Table of Contents

Definition and explanation.

Pledging accounts receivable is essentially the same as using any asset as collateral for a loan. Cash is obtained from a lender by promising to repay.

If the loan is not repaid, the collateral will be converted to cash, and the cash will be used to retire the debt.

The receivables can be either an identified set of notes and accounts or a general group in which new ones can be added and old ones retired.

The collection of a pledged receivable has no impact on the loan balance.

The pledging agreement usually calls for the substitution of another receivable for the one collected.

As an example, suppose that Sample Company borrows $80,000 on 31 December 2023, and agrees to pay back $81,600 on 1 April 2024.

Further, it pledges $100,000 of trade receivables for the loan. The company would make three journal entries as follows:

The last two entries can be combined, but they are shown separately here to facilitate a comparison of pledging with the other approaches.

The only financial statement disclosures provided for pledged receivables are notes or parenthetical comments.

A similar notation is provided for the notes payable .

Assignor Collects

As an alternative to pledging, the company may decide to assign its receivables to a lending institution.

Under this arrangement, the original holder essentially transfers title to the third party but agrees to collect the receivables and pay the cash to the factor .

Suppose that Sample Company obtains $80,000 cash on 31 December 2023 by assigning $100,000 of its trade receivables.

The company agrees to place the collections in a special restricted checking account from which it will repay the original $80 000 plus a $2,400 finance charge on April 1, 2024.

These journal entries would be made as follows:

To record partial collection of the assigned accounts :

To accrue the finance charge:

To reclassify the uncollected accounts and unrestricted cash:

The disclosures that would be provided on various balance sheet dates are shown in the following example, under the simplifying assumption that no other activity took place.

Notice that the payable to the factor is contra to the assigned accounts. Any restricted cash balance is, in turn, contra to the payable account.

Most arrangements of this type call for more frequent payments than the example shows.

The net result of the assignment is that Sample Company obtained $80,000 by giving up $82,400 of receivables.

Pledging Accounts Receivable FAQs

What is pledging accounts receivable.

Pledging Accounts Receivable means that a business gives up some of its rights to an asset in order to borrow money. For example, you could pledge your car title as collateral for a loan. If the loan isn't repaid, the lender can take possession of your car.

What are the journal entries for pledging accounts receivable?

There are no Special Journal entries required when you pledge your Accounts Receivable as collateral for a loan. The lender still has to approve giving up your Accounts Receivable before making the loan.

How are accounts receivable journal entries prepared?

Accounts Receivable are money owed to a company by their customers for products they've already received. Accounts are recorded in the balance sheet as assets.

What are the journal entries for assigning Accounts Receivable as collateral for a loan?

The entry to record assignment of Accounts Receivable as collateral would be a credit to cash, and a debit to assign Accounts Receivable. The cash account is debited because the company gave up the assigned receivables. The assign Accounts Receivable account is credited because they still owe this money to their customers.

What are the main financial statements in an assignment of accounts receivable?

The three main Financial Statements in an assignment of Accounts Receivable are the income statement, balance sheet, and Cash Flow statement. The income statement and Cash Flow statements would report the repayments on the receivables.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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• Receivables and Payables User Guide
• Receivables and Payables Management
• Assignment Receivables and Payables

5.2 Assignment Receivables and Payables

This topic describes the systematic instruction to assign the invoices/debit notes.

• On Receivables and Payables Management screen, select the action as Assignment .
• Click Proceed to view the search parameters.
• Specify the value for at least one mandatory field to search the instrument(s).

Figure 5-6 Assignment Receivables and Payables

• Optional: In the Reference Number column, click the link to view the details of the instrument.
• Select the invoice(s)/debit note(s) to be assigned.
• Optional: In the Remarks field, enter the remarks for the assignment of the invoice(s)/debit note(s).
• Click Apply to make changes in the grid.
• If required, click Undo to revert the applied changes.
• Click Submit to submit the assignment and send it for authorization (if applicable).

Parent topic: Receivables and Payables Management

Account Receivables

• First Online: 01 November 2022

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• Felix I. Lessambo 2  

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Receivable is a general term that refers to all monetary obligations owed to the business by its customers or debtors. As long as a business expects to recover the money from the debtors, it records its receivables as assets on its balance sheet because it expects to derive future benefits from them. It does not matter whether they are due in the current period or not.

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Rieva Lesonsky ( 2020 ): What Is the Difference Between Factoring and Accounts Receivable Financing?- https://fundbox.com/blog/difference-between-factoring-and-receivables-financing/ .

Adrian Katz ( 2011 ): Accounts Receivable Securitization, The Journal of Structured Finance Summer , 17 (2), pp. 23-27; https://doi.org/10.3905/jsf.2011.17.2.023 .

Adrian Katz (2011): Accounts Receivable Securitization, The Journal of Structured Finance Summer , 17 (2), pp. 23–27; https://doi.org/10.3905/jsf.2011.17.2.023 .

Rieva Lesonsky (2020): What Is the Difference Between Factoring and Accounts Receivable Financing?- https://fundbox.com/blog/difference-between-factoring-and-receivables-financing/ .

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Felix I. Lessambo

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About this chapter

Lessambo, F.I. (2022). Account Receivables. In: Financial Statements. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-15663-2_4

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