General Form of Factoring Agreement - Assignment of Accounts Receivable
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Assignment Of Receivables Agreement FAQ
What Is a Factoring Agreement? A company and a factor enter into an agreement in which the factor purchases a company's accounts receivable (such purchased accounts are called factored accounts), collects on the factored accounts, then pays the company the purchase price of the accounts.
The simplest definition of accounts receivable is money owed to an entity by its customers. Correspondingly, the amount not yet received is credit and, of course, the amount still owed past the due date is collections.
The purpose of assigning accounts receivable is to provide collateral in order to obtain a loan. To illustrate, let's assume that a corporation receives a special order from a new customer whose credit rating is superb.
What is a Notice of Assignment? The Notice of Assignment is a simple letter that the factor company will send to your customers whose invoices you are factoring.
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.In the case of factoring, the contractor sells its accounts receivable to the financial institution or the factor.
At the point of delivering the goods or services, the company debits Accounts Receivable and credits Sales Revenues or Service Revenues. When an account receivable is collected 30 days later, the asset account Accounts Receivable is reduced and the asset account Cash is increased.
The factoring company pays you the bulk of the invoiced amount immediately, typically up to 80-90% of the value, after verifying that the invoices are valid. Your customers pay the factoring company directly.The factoring company pays you the remaining invoice amount minus their fee once they've been paid in full.
Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution.The borrower pays interest and a service charge on the loan and the assigned receivables serve as collateral.