Corporate, Commercial Law and Dispute Resolution · Commercial Disputes, Debt and Bankruptcy
Transfer of receivables through factoring or assignment allows a business to move a debt claim to another party, but the two mechanisms serve different commercial objectives. Assignment mainly transfers the right of claim, while factoring combines the receivable with financing and, depending on the arrangement, collection services or risk transfer.
Assignment of Receivables
Assignment transfers the creditor's right of claim from the original creditor to a new creditor. It can be used for debts, loans and other monetary obligations and does not necessarily involve advance financing.
The debtor should be notified of the change of creditor in accordance with the applicable arrangement. Unless the agreement provides otherwise, non-payment risk may remain economically connected with the original creditor.
Factoring
Factoring is a financial service in which the factor acquires receivables and provides financing, often as an advance against the amount due. Depending on whether the arrangement is with or without recourse, the factor may also assume part of the non-payment risk.
Factoring can include receivables administration and collection, making it more than a simple transfer of the claim.
Choosing Between the Two
Factoring may be more suitable where the business needs immediate working capital and wants to transfer collection functions or reduce non-payment exposure. Assignment may be preferable where the main objective is simply to transfer the claim without a financing service.
Contracts should clearly define the transferred claim, price or financing terms, recourse, collection responsibilities and notification of the debtor.
Recourse is a key commercial distinction in factoring. In a recourse structure, the client may remain responsible if the debtor does not pay; in a non-recourse structure, more of that credit risk may be transferred to the factor subject to the agreement. Pricing should therefore be compared together with risk allocation, not only with the amount of immediate financing.
Receivables transfer strategy should start with the business objective—financing, risk transfer or simple disposal of the claim—because that objective determines whether factoring or assignment provides the better commercial structure.
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Price: Factoring or Assignment of Receivables: Which Fits Your Business?