ASSIGNMENT OF RECEIVABLES Meaning and
Definition
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The term "Assignment of Receivables" refers to a legal and financial arrangement where a company transfers its right to receive payment from its customers or debtors to another party. This assignment typically involves the sale or assignment of the company's accounts receivable, which are the amounts owed to the company by its customers for goods or services provided.
In this arrangement, the company (assignor) transfers its receivables to another entity (assignee), often a financial institution or a specialized factoring company. The assignee assumes the right to collect the payment from the customers and becomes the new creditor. In return, the assignor receives immediate cash or credit, effectively converting its accounts receivable into cash.
The assignment of receivables is often undertaken by companies in need of immediate liquidity and a way to improve their cash flow. By transferring the receivables, they can access funds that may have been tied up in long payment cycles or slow-paying customers. This can assist the company in meeting its financial obligations, such as paying suppliers or employees, or investing in business growth initiatives.
The assignment of receivables is typically governed by a legal contract known as an assignment agreement. This agreement outlines the terms and conditions of the assignment, including the rights and responsibilities of both the assignor and assignee. It may also cover issues such as recourse, where the assignor guarantees the payment of the receivables, or non-recourse, where the assignee bears the risk of non-payment.
