assignment with recourse

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What Does "Without Recourse" Mean in the Assignment Area of an Auto Contract?

An "assignment without recourse" clause is not uncommon in auto loans and gives your lender the power to sell your loan.

It is common practice for lenders to sell their loans after closing on them -- and this is especially true when it comes to mortgages and auto loans. If your loan contract has an "assignment without recourse" clause, it means that this could happen to you.

What an "assignment without recourse" clause means to you, the borrower Essentially, an assignment clause in your auto loan contract means that you are giving the lender permission to either sell or transfer your loan to another finance company.

Lenders sell loans for a variety of reasons -- for example, many lenders simply act as originators and don't like to hold many outstanding loans on their books. Or if a lender finds itself with too much outstanding auto loan debt, it could decide to sell a portion of its loan portfolio.

Whatever the reason for selling, the "without recourse" part of the clause means that you can no longer hold the initial lender responsible for any errors or other loan-related issues. Upon sale of the loan to a new lender, the borrower's relationship with their original lender is automatically terminated.

The borrower must deal with a new lender for all issues regarding the loan and must make payments to the new lender. The new lender cannot change the loan's terms, such as the interest rate or loan length, but may have different policies in regards to issues like late payments. If your loan does get sold, it's important to thoroughly read any information you receive from the new lender so you're familiar with any changes that may take place.

The bottom line on "without recourse" clauses If you want an auto loan that will be maintained by a specific lender for the duration of the loan, be sure to thoroughly read your contract (you should be doing this anyway), and make sure there is no "assignment without recourse" clause. If you're not sure if there is or not, this is a question to specifically ask your lender, so you'll know whether or not your loan can be sold without any responsibility remaining on your lender's shoulders.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at  [email protected] . Thanks -- and Fool on!

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Example Journal Entries for the Assignment of Trade Receivables

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Introduction, brief explanation of trade receivables.

In this article, we’ll cover example journal entries for the assignment of trade receivables. Trade receivables, often referred to as accounts receivable, represent the amounts owed to a business by its customers for goods or services delivered but not yet paid for. These receivables are considered current assets on a company’s balance sheet and play a crucial role in the business’s cash flow and liquidity. They arise from the credit sales extended to customers, allowing businesses to increase sales by offering flexible payment terms.

Importance of Managing Trade Receivables Effectively

Effective management of trade receivables is vital for maintaining a healthy cash flow and ensuring the financial stability of a business. Proper handling of receivables can lead to:

• Improved Cash Flow: Timely collection of receivables ensures that the business has sufficient cash to meet its operational needs and invest in growth opportunities.
• Minimized Bad Debts: By regularly monitoring and managing receivables, businesses can reduce the risk of non-payment and minimize bad debt expenses.
• Enhanced Customer Relationships: Efficient receivables management fosters positive relationships with customers by offering them flexible payment options while ensuring timely follow-ups.
• Accurate Financial Reporting: Proper accounting for receivables ensures accurate financial statements, which are essential for making informed business decisions and maintaining investor confidence.

Overview of Assigning Trade Receivables (Reasons, Benefits, and Risks)

Assigning trade receivables involves transferring the rights to collect receivables from customers to a third party, such as a financial institution or a factoring company. This process can be beneficial for businesses seeking immediate cash flow improvements or those looking to mitigate the risks associated with credit sales. There are two main types of assignments: with recourse and without recourse.

Reasons for Assigning Trade Receivables:

• Immediate Cash Flow: Businesses can quickly convert receivables into cash, providing immediate funds for operational needs or investment opportunities.
• Risk Mitigation: By transferring the collection risk to a third party, businesses can reduce their exposure to potential bad debts.
• Improved Financial Ratios: Assigning receivables can improve liquidity and leverage ratios, making the business more attractive to investors and lenders.

Benefits of Assigning Trade Receivables:

• Enhanced Liquidity: Immediate access to cash improves the company’s liquidity position, enabling it to meet short-term obligations and invest in growth.
• Streamlined Operations: Outsourcing the collection process allows businesses to focus on core activities rather than chasing payments.
• Credit Protection: In a non-recourse assignment, the risk of non-payment is transferred to the third party, protecting the assignor from credit losses.

Risks of Assigning Trade Receivables:

• Cost: The fees associated with assigning receivables can be significant, impacting the overall profitability of the business.
• Customer Relationships: Involving a third party in the collection process can potentially strain relationships with customers if not managed carefully.
• Reliance on Third Parties: Businesses become dependent on the third party’s efficiency and effectiveness in collecting receivables.

Understanding the dynamics of trade receivables and the implications of assigning them is essential for businesses to make informed decisions and maintain financial health.

Understanding Trade Receivables

Definition of trade receivables.

Trade receivables, also known as accounts receivable, represent the money owed to a business by its customers for products or services provided on credit. These receivables are recorded as current assets on the balance sheet, as they are expected to be converted into cash within a year. Trade receivables arise from the sale of goods or services where the payment is deferred, creating a formal obligation for the customer to pay the business at a later date.

The Role of Trade Receivables in Business Operations

Trade receivables play a critical role in the financial health and operational efficiency of a business. Their importance can be summarized as follows:

• Revenue Recognition: Trade receivables are a direct result of sales on credit, contributing to the revenue generation of a business.
• Cash Flow Management: Effective management of trade receivables ensures a steady inflow of cash, which is vital for meeting day-to-day operational expenses, repaying debts, and investing in growth opportunities.
• Customer Relationships: Offering credit terms can enhance customer satisfaction and loyalty, as it provides flexibility and convenience in payment, potentially leading to increased sales.
• Financial Planning: Accurate recording and monitoring of trade receivables help in forecasting cash flow and planning financial strategies accordingly.

Difference Between Trade Receivables and Other Types of Receivables

Trade receivables are a specific type of receivable that arises from the sale of goods or services on credit. However, businesses may also have other types of receivables, which differ in their origin and nature:

• Trade Receivables: These are amounts due from customers for goods or services sold on credit, typically short-term and unsecured.
• Notes Receivable: These are formal, written promises to pay a certain amount at a future date, often with interest. Notes receivable are usually more formalized and can be long-term, providing greater security for the lender.
• Other Receivables: This category includes various types of receivables not directly related to the core business operations, such as loans to employees, tax refunds, or interest receivable. These receivables may not be as closely tied to sales activities and can have different collection terms and risks.

Understanding the nuances between trade receivables and other types of receivables is essential for accurate financial reporting and effective management of a company’s assets. By distinguishing between these categories, businesses can better track and manage their receivables, ensuring a more accurate representation of their financial position.

Assignment of Trade Receivables

Definition and explanation of assigning trade receivables.

Assigning trade receivables involves transferring the rights to collect the receivables from the original holder (the assignor) to a third party (the assignee). This process allows businesses to convert their receivables into immediate cash, enhancing liquidity and improving cash flow management. The assignment can be done either as a sale of receivables or as a collateral for a loan.

In an assignment, the business still records the receivables on its balance sheet but reports the assignment as a separate liability or reduction in the value of the receivables, depending on the nature of the assignment. The key benefit of assigning trade receivables is that it allows businesses to access funds tied up in credit sales without waiting for customers to pay their invoices.

Types of Assignments

There are two main types of assignments: with recourse and without recourse.

Assignment with Recourse

In an assignment with recourse, the assignor retains the risk of non-payment by the debtor. This means that if the customer fails to pay the receivable, the assignor is obligated to reimburse the assignee. Assignments with recourse often have lower costs compared to non-recourse assignments because the risk remains with the assignor.

Journal Entry Example:

• When assigning the receivable:

Debit: Cash Debit: Loss on Sale of Receivables Credit: Accounts Receivable

If the receivable is not paid by the customer:

Debit: Accounts Receivable Credit: Cash

Assignment without Recourse

In an assignment without recourse, the risk of non-payment is transferred to the assignee. This means that if the customer fails to pay, the assignee bears the loss, not the assignor. Non-recourse assignments usually come at a higher cost due to the increased risk taken on by the assignee.

Common Scenarios Where Businesses Assign Trade Receivables

Assigning trade receivables can be a strategic move for businesses in various situations. Some common scenarios include:

• Improving Cash Flow: Businesses with seasonal sales patterns or those facing cash flow constraints may assign receivables to ensure a steady stream of funds.
• Financing Growth: Companies looking to finance expansion projects or new ventures might assign receivables to quickly raise capital without incurring additional debt.
• Risk Management: Firms seeking to reduce their exposure to credit risk may assign receivables, particularly in industries with high default rates or during economic downturns.
• Simplifying Collections: Businesses wanting to streamline their operations might assign receivables to a third party, outsourcing the collection process and reducing administrative burdens.
• Meeting Financial Covenants: Companies that need to comply with financial covenants set by lenders can use receivable assignments to improve their liquidity ratios and other financial metrics.

By understanding the various types of assignments and the scenarios in which they are used, businesses can make informed decisions to optimize their financial management and enhance operational efficiency.

Example Journal Entries

Detailed examples of journal entries for different scenarios.

Scenario: A company assigns $100,000 of trade receivables to a financial institution with recourse, receiving $95,000 in cash after a 5% service fee.

• Initial Assignment:

Debit: Cash $95,000 Debit: Loss on Sale of Receivables $5,000 Credit: Accounts Receivable $100,000

Explanation:

• Debit: Cash increases by $95,000, reflecting the cash received.
• Debit: Loss on Sale of Receivables records the 5% service fee ($5,000) as an expense.
• Credit: Accounts Receivable decreases by $100,000, indicating the assignment of the receivables.

Impact on Financial Statements:

• The company’s assets (cash) increase by $95,000.
• An expense of $5,000 is recognized, reducing net income.
• Accounts receivable decrease by $100,000.
• If the Receivable is Not Paid by the Customer:

Debit: Accounts Receivable $100,000 Credit: Cash $100,000

• Debit: Accounts Receivable reinstates the receivable as the company must now collect it.
• Credit: Cash decreases by $100,000, reflecting the reimbursement to the financial institution.
• Accounts receivable increase by $100,000.
• Cash decreases by $100,000.

Scenario: A company assigns $100,000 of trade receivables to a financial institution without recourse, receiving $90,000 in cash after a 10% service fee.

• Explanation: Debit: Cash increases by $90,000, reflecting the cash received. Debit: Loss on Sale of Receivables records the 10% service fee ($10,000) as an expense. Credit: Accounts Receivable decreases by $100,000, indicating the assignment of the receivables.
• Impact on Financial Statements: The company’s assets (cash) increase by $90,000. An expense of $10,000 is recognized, reducing net income. Accounts receivable decrease by $100,000.

Partial Assignment

Scenario: A company assigns $50,000 of its $200,000 trade receivables to a financial institution, receiving $47,500 in cash after a 5% service fee.

• Explanation: Debit: Cash increases by $47,500, reflecting the cash received. Debit: Loss on Sale of Receivables records the 5% service fee ($2,500) as an expense. Credit: Accounts Receivable decreases by $50,000, indicating the partial assignment of receivables.
• Impact on Financial Statements: The company’s assets (cash) increase by $47,500. An expense of $2,500 is recognized, reducing net income. Accounts receivable decrease by $50,000.

Factoring vs. Assignment

Factoring Example:

Scenario: A company sells $100,000 of trade receivables to a factoring company, receiving $90,000 in cash after a 10% discount.

• Explanation: Debit: Cash increases by $90,000, reflecting the cash received. Debit: Factoring Expense records the 10% discount ($10,000) as an expense. Credit: Accounts Receivable decreases by $100,000, indicating the sale of receivables.

Assignment Example:

Scenario: A company assigns $100,000 of trade receivables to a bank as collateral for a $90,000 loan.

• Explanation:Debit: Cash increases by $90,000, reflecting the loan received. Credit: Loan Payable records the liability for the loan.
• Impact on Financial Statements: The company’s assets (cash) increase by $90,000. A liability (loan payable) of $90,000 is recognized. Accounts receivable remain on the balance sheet but are disclosed as collateral in the notes to the financial statements.

By understanding these journal entries, businesses can accurately record the financial transactions associated with different types of assignments and factoring of trade receivables, ensuring precise financial reporting and effective management of receivables.

Practical Applications and Implications

How businesses use assignments to manage cash flow.

Assigning trade receivables is a strategic financial tool used by businesses to manage cash flow more effectively. By converting receivables into immediate cash, companies can:

• Maintain Operational Liquidity: Businesses often face timing differences between cash inflows and outflows. Assigning receivables ensures that companies have sufficient cash to meet operational expenses such as payroll, inventory purchases, and utility bills.
• Invest in Growth Opportunities: Immediate access to cash allows businesses to invest in growth opportunities such as expanding production capacity, entering new markets, or developing new products.
• Reduce Borrowing Costs: By using assigned receivables to generate cash, companies can reduce their reliance on traditional loans, which might come with higher interest rates and more stringent repayment terms.
• Manage Seasonal Fluctuations: Businesses with seasonal sales patterns can use receivable assignments to smooth out cash flow throughout the year, ensuring they have funds during off-peak periods.

Impact on Financial Health and Creditworthiness

The assignment of trade receivables can have significant implications for a business’s financial health and creditworthiness:

• Improved Liquidity Ratios: Assigning receivables increases the company’s cash reserves, improving liquidity ratios such as the current ratio and quick ratio. These enhanced ratios signal better short-term financial health to investors and creditors.
• Enhanced Creditworthiness: Consistent management of cash flow through receivable assignments can improve a company’s creditworthiness. Lenders and suppliers may view the business as more financially stable and less risky.
• Balance Sheet Implications: While assigned receivables may still appear on the balance sheet (depending on the assignment type), the associated liabilities or reductions are also recorded. This transparency helps maintain accurate financial reporting.
• Expense Recognition: Fees and discounts associated with assigning receivables are recorded as expenses, which can impact net income. However, the benefits of improved cash flow and liquidity often outweigh these costs.

Legal Considerations and Documentation Required

Assigning trade receivables involves several legal considerations and requires thorough documentation to protect the interests of both the assignor and the assignee:

• Assignment Agreement: A formal agreement outlining the terms of the assignment is essential. This document should specify the receivables being assigned, the rights and obligations of each party, the fees or discounts applied, and the recourse terms if applicable.
• Notification of Debtors: In many cases, the debtor (customer) must be notified of the assignment. This notification ensures that payments are directed to the assignee and clarifies the debtor’s obligations.
• Compliance with Regulations: Businesses must comply with relevant laws and regulations governing the assignment of receivables. This includes adhering to accounting standards (e.g., GAAP or IFRS) and any industry-specific regulations.
• Protection of Interests: Both parties must ensure that their interests are protected in the event of non-payment. This might include specifying procedures for handling disputed receivables and detailing the steps to be taken if the assignor defaults on their obligations.
• Confidentiality Clauses: Assignment agreements often include confidentiality clauses to protect sensitive financial information about the receivables and the involved parties.

By understanding and addressing these practical applications, financial impacts, and legal requirements, businesses can effectively utilize the assignment of trade receivables to manage cash flow, enhance financial stability, and maintain compliance with legal standards.

Common Mistakes and How to Avoid Them

Frequent errors in recording journal entries for assignments.

• Error: Misclassifying assigned receivables as still fully owned by the business, leading to inaccuracies in financial statements.
• Correction: Ensure assigned receivables are properly recorded as either a sale or collateral, reflecting the true nature of the transaction.
• Error: Failing to account for service fees, discounts, or losses incurred during the assignment process.
• Correction: Always include any associated fees or losses as expenses in the journal entries to accurately reflect the cost of the assignment.
• Error: Not recording potential liabilities in assignments with recourse, which can misrepresent the company’s financial obligations.
• Correction: Record a liability for the potential repayment obligation in assignments with recourse to ensure all financial responsibilities are accurately documented.
• Error: Recording assigned receivables without removing them from the accounts receivable balance, resulting in double-counting.
• Correction: Ensure that the assigned receivables are deducted from the accounts receivable account to prevent inflation of asset values.
• Error: Failing to notify debtors of the assignment, leading to payment confusion and potential collection issues.
• Correction: Always notify debtors promptly and clearly about the assignment to ensure payments are directed correctly to the assignee.

Tips for Accurate Record-Keeping and Compliance with Accounting Standards

• Keep comprehensive records of all assignment agreements, including terms, conditions, and notifications sent to debtors. This documentation will support accurate journal entries and compliance with legal requirements.
• Conduct frequent reconciliations of assigned receivables to ensure that the recorded amounts match the actual assignments and collections. This practice helps identify and correct discrepancies promptly.
• Follow relevant accounting standards such as GAAP or IFRS when recording assignments. These standards provide guidelines on how to treat assigned receivables, ensuring consistency and accuracy in financial reporting.
• Establish strong internal controls over the assignment process to prevent errors and fraud. Controls should include authorization procedures, segregation of duties, and regular audits.
• Utilize accounting software that supports receivables management and assignment transactions. Software can automate calculations, track assignments, and generate accurate journal entries, reducing the risk of human error.
• Ensure that accounting personnel are well-trained in handling assignments of trade receivables. Regular training sessions and updates on new standards or practices can help maintain accuracy and compliance.
• When in doubt, seek advice from financial experts or auditors. Professional guidance can help navigate complex transactions and ensure that all assignments are recorded correctly and in compliance with accounting standards.

By being aware of common mistakes and following these tips for accurate record-keeping, businesses can avoid errors in recording journal entries for assignments of trade receivables and ensure compliance with accounting standards. This approach enhances the reliability of financial statements and supports effective financial management.

Case Studies and Real-World Examples

Case study of a business using assignment of trade receivables.

Company Background: XYZ Manufacturing is a mid-sized company that produces industrial machinery. The company experiences seasonal fluctuations in sales, with peak periods in the spring and fall. To manage cash flow during the slower winter months, XYZ Manufacturing decided to assign a portion of its trade receivables to a financial institution.

Scenario: In November, XYZ Manufacturing had $500,000 in outstanding trade receivables. To ensure sufficient cash flow for the upcoming winter, the company assigned $300,000 of these receivables to a financial institution with recourse. The institution provided $285,000 in cash upfront, after a 5% service fee ($15,000).

Journal Entries:

Debit: Cash $285,000 Debit: Loss on Sale of Receivables $15,000 Credit: Accounts Receivable $300,000

• Assume a customer defaults on a $50,000 receivable. Debit: Accounts Receivable $50,000 Credit: Cash $50,000

Analysis of the Financial Impact and Outcomes

Improved Cash Flow: By assigning $300,000 of trade receivables, XYZ Manufacturing received $285,000 in cash. This immediate infusion of funds allowed the company to cover operational expenses, such as payroll and supplier payments, during the slower winter months. The improved cash flow also enabled the company to take advantage of early payment discounts from suppliers, further reducing costs.

• Balance Sheet: The accounts receivable balance decreased by $300,000, reflecting the assigned receivables. The cash balance increased by $285,000, and an expense of $15,000 was recognized as a loss on the sale of receivables. If any customer defaulted, the company recorded the defaulted amount as a receivable again and reduced its cash balance by the same amount.
• Income Statement: The $15,000 service fee was recorded as an expense, reducing the company’s net income for the period. However, the improved cash flow and ability to capitalize on early payment discounts provided a net positive effect overall.

Creditworthiness and Financial Health:

• Creditworthiness: Assigning receivables with recourse meant XYZ Manufacturing retained some risk of non-payment. Despite this, the company’s creditworthiness improved due to better liquidity and a more favorable cash position. Lenders and suppliers viewed the company as more financially stable, leading to better credit terms and reduced borrowing costs.
• Financial Health: The immediate access to cash allowed XYZ Manufacturing to maintain smooth operations and avoid the financial strain typically associated with seasonal fluctuations. The company could also invest in maintenance and minor capital expenditures during the off-peak period, ensuring readiness for the next peak season.

Lessons Learned:

• Effective Cash Flow Management: The case of XYZ Manufacturing highlights the importance of using trade receivables assignment as a tool for managing cash flow, particularly for businesses with seasonal sales patterns.
• Cost-Benefit Analysis: Companies must weigh the costs of assigning receivables, such as service fees, against the benefits of improved liquidity and financial stability.
• Risk Management: Even with recourse assignments, businesses can manage the risk of customer defaults through careful credit evaluations and maintaining a diversified customer base.

The case of XYZ Manufacturing demonstrates how the strategic use of trade receivables assignments can enhance a company’s financial stability, improve cash flow, and support sustained growth, especially in the face of seasonal sales fluctuations.

Summary of Key Points

In this article, we explored the concept of trade receivables and the practice of assigning them to manage cash flow. We covered the definition and role of trade receivables in business operations, the different types of assignments (with recourse and without recourse), and provided detailed examples of journal entries for various scenarios. We also discussed the practical applications and implications of assigning trade receivables, including their impact on financial health and creditworthiness, and the legal considerations involved. Additionally, we highlighted common mistakes in recording journal entries and provided tips for accurate record-keeping and compliance with accounting standards. Finally, we examined a real-world case study to illustrate the benefits and challenges of trade receivables assignments.

Importance of Accurate Journal Entries

Accurate journal entries are crucial for maintaining the integrity of financial records and ensuring compliance with accounting standards. Properly recorded entries provide a clear and accurate picture of a company’s financial position, which is essential for making informed business decisions. In the context of trade receivables assignments, accurate journal entries help businesses track their receivables, manage cash flow effectively, and ensure transparency in financial reporting. Mistakes in recording assignments can lead to financial discrepancies, misrepresentation of assets and liabilities, and potential legal issues.

Final Thoughts on Best Practices for Managing Trade Receivables Assignments

To effectively manage trade receivables assignments, businesses should adopt the following best practices:

• Thorough Documentation: Maintain detailed records of all assignment agreements, including terms, conditions, and notifications to debtors. This ensures transparency and supports accurate financial reporting.
• Regular Reconciliation: Conduct frequent reconciliations of assigned receivables to identify and correct discrepancies promptly, ensuring the accuracy of financial statements.
• Compliance with Standards: Adhere to relevant accounting standards (GAAP or IFRS) when recording assignments. These standards provide guidelines on how to treat assigned receivables consistently and accurately.
• Strong Internal Controls: Implement robust internal controls over the assignment process to prevent errors and fraud. This includes authorization procedures, segregation of duties, and regular audits.
• Use of Technology: Leverage accounting software that supports receivables management and assignment transactions. Automation can reduce the risk of human error and streamline the recording process.
• Training and Education: Ensure that accounting personnel are well-trained in handling assignments of trade receivables. Regular training sessions and updates on new standards or practices help maintain accuracy and compliance.
• Professional Guidance: Seek advice from financial experts or auditors when dealing with complex transactions. Professional guidance can help navigate the intricacies of receivables assignments and ensure proper recording.

By following these best practices, businesses can effectively manage the assignment of trade receivables, optimize their financial health, and maintain accurate and compliant financial records. This strategic approach supports sustainable growth and enhances overall financial stability.

Additional Resources and References

• Website: FASB
• Description: Provides information on accounting standards and updates for generally accepted accounting principles (GAAP) in the United States.
• Website: IFRS
• Description: Offers guidelines and standards for international financial reporting, including those relevant to trade receivables.
• Website: AICPA
• Description: A resource for accounting professionals providing guidance, standards, and best practices in accounting.
• Website: CFI
• Description: Provides courses and resources on financial analysis, accounting, and corporate finance, including trade receivables management.
• Website: Investopedia
• Description: Offers comprehensive articles and definitions related to finance and accounting, including trade receivables and assignments.

Glossary of Terms Used in the Article

• Amounts owed to a business by its customers for goods or services delivered on credit.
• The transfer of rights to collect receivables from the assignor (the business) to the assignee (a third party).
• A type of assignment where the assignor retains the risk of non-payment by the debtor.
• A type of assignment where the risk of non-payment is transferred to the assignee.
• The sale of receivables to a third party (factor) at a discount in exchange for immediate cash.
• An asset pledged as security for a loan, which can be forfeited in case of default.
• The ability of a business to meet its short-term obligations using its available assets.
• Assets that are expected to be converted into cash within one year, such as accounts receivable.
• An expense recorded when receivables are sold or assigned at a value lower than their book value.
• A fee charged by the assignee for the assignment of receivables, usually a percentage of the assigned amount.
• Metrics used to evaluate the financial health of a business, such as liquidity ratios and leverage ratios.
• The process of ensuring that two sets of records (e.g., bank statements and accounting records) are in agreement.
• Procedures and policies implemented by a business to ensure the integrity of financial and accounting information.

By consulting these additional resources and familiarizing yourself with the glossary of terms, you can gain a deeper understanding of the assignment of trade receivables and the associated accounting practices.

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With Recourse Definition | Becker

Accounting dictionary, with recourse.

If an assignment of accounts receivable is with recourse, the factor has an option to resell any uncollectible receivables to the original assignor. If an assignment of accounts receivable is with recourse, two treatments are possible. The transfer may be considered either a sale or a borrowing (with the accounts receivable as collateral). See also factoring of accounts receivable and pledging of accounts receivable.

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Credit assignment without and with recourse.

It often happens that you have to "chase" a creditor to obtain what is owed to you, but also because of the urgency to obtain as soon as possible the liquidity necessary to carry out your company's business objectives.

In order to reduce the time, one of the solutions is represented by the so-called assignment of credit. This is a transfer of a sum of money or even a service that involves three parties: the assignor, the assignee and the assigned party.

• The assignor is the one who holds the credit.
• The assignee is the one who receives the credit transferred.
• The assignee is essentially the debtor.

Article 1260 of the Civil Code governs this practice.

Differences between the assignment of receivables without recourse and with recourse

The assignment of credit, in turn, can be with or without recourse.

• Non-recourse : in this case the assignor guarantees only the existence of the credit and not the solvency of the debtor.
• With recourse : in this case the assignor is responsible for payment, so much so that he must take responsibility for it in the event of default by the debtor.

Factoring with and without recourse

Let us take a concrete example of the assignment of a credit without recourse and with recourse, using a case of Factoring .

This type of factoring occurs when a company assigns a credit to a Bank, which represents the factor.

In non-recourse, the company obtains liquidity from the factor, freeing itself of any responsibility, but with the reduction of part of the liquidity. With recourse, the company guarantees solvency but in return gets more liquidity from the Bank.

Phersei Agency proposes itself as an intermediary for the service of Credit Recovery without and with recourse .

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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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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Factor Accounts Receivable

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on January 30, 2024

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Table of Contents

Definition and explanation.

The original holder obtains cash at once in return for the proceeds collected in the future, except that the collection process is handled by a third party (often known as a fa ctor ).

If the assigned receivables are insufficient to repay the factor because of bad debts , the original holder must transfer additional receivables.

If the factor collects more than the amount advanced, the excess is turned back to the original holder, as well as any uncollected accounts .

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

The factor will collect the receivables and keep the first $85,000 to repay the cash advance and a $5,000 service charge.

Settlement is to be made on 1 April 2024, which will involve making a payment to Sample Company of any excess cash and the return of the uncollected accounts. The journal entries shown below would be made.

The journal entry used to record the cash received from the factor is as follows:

The journal entry used to record the transfer of the receivables to the factor:

The journal entries to accrue the finance charge are shown below.

This last entry reflects the fact that the factor collected $92,000 cash and kept $85,000. The uncollected accounts are transferred back.

This example illustrates how the events described in the previous section would be reflected in Sample Company's balance sheet —assuming, for simplicity, that nothing else happens.

Notice that the payable to the factor is contra to the assigned receivables. Until informed about the amount collected and kept, the company will continue to carry the assigned receivables and the payable on the books at their original amounts.

The net result of the arrangement is that Sample Company exchanged $85,000 of its receivables for $80,000 cash.

Assignment Without Recourse

Assigning without recourse differs from as signing with recourse in that the factor does not get to substitute other accounts for the uncollectible ones.

The factor does not have to return any cash in excess of the amount advanced or any uncollected accounts.

In effect, assignment without recourse is the same as an outright sale of the receivables.

Accounting for this transaction is si mple because it is the same as the sale of any other asset . The holder records a loss for the difference between the proceeds and the book value .

The factor (or buyer) usually obtains a high discount from the book value of the receivables because of the risk of uncollectibility.

Suppose that Sample Company receives $90,000 cash on 31 December 2023 for assigning $100,000 of its receivables without recourse. The following journal entry would be recorded:

This arrangement is essentially the one used by retailers when they enroll in a bank credit card plan.

Upon submitting charge slips from customers, they receive a credit in their bank account for a percentage of the sale.

The cost is incurred by the retailer for the following purposes:

• Obtain the cash quickly
• Avoid bad debt losses
• Save clerical costs
• Increase sales

Since the arrangement dealing with credit cards is related to ongoing operations, the debit entry is made to an expense account instead of a loss account.

Factor Accounts Receivable FAQs

What is factoring.

Factoring is a form of financing in which your company sells its Accounts Receivable (collectible debt owed to you by customers) to another business known as the "factor" at a discount.

Does my company need any special expertise or training to do factoring?

No, regular businesses can successfully factor their Accounts Receivable. A factor will help your company complete all of the paperwork and advise you on how to optimize its factoring program.

How much money should I factor in?

A business should factor all of the Accounts Receivable that are within 90 days old. This will give you more control over your Cash Flow since you can factor on a regular basis instead of waiting until you have collected enough money to pay off an entire account payable.

Will factoring affect our company's credit rating?

No, it will not affect your company's credit rating. There is no impact on a company's current line of credit and it does not affect the company's ability to obtain additional borrowing in the future.

What are "factoring fees" and do I have to pay them?

The factor will charge a separate fee for its services when it purchases your Accounts Receivable. This fee is usually not more than 1% of the total sales price and it may be negotiable.

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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Accounts Receivable Factoring: Recourse vs. Non-Recourse Factoring

Factoring is when a company sells its accounts receivable to another company in exchange for cash  in advance of the accounts receivable payment due date. The company pledges its rights to collect its accounts receivable to the Factor in exchange for a cash advance. Companies decide to factor their accounts receivable for several reasons. Some companies are looking for cash to pay pressing financial obligations, especially when facing an unexpected increase in sales or when accounts payable become due faster than the terms of payment under the accounts receivable. 

How Factoring Works

1. You submit an invoice/progress payment on work that has been completed

2. The invoice is verified with your client

3. The lender provides immediate funding

4. Your client remits payment within their payment terms which is usually 30 to 60 days

5. The lender issues a rebate for the remaining reserve balance, less the factoring fee

Companies also choose to factor when their customers require extended payment terms. By not providing extended payment terms, a contract, sale or customer relationship can be lost. Other companies choose to focus on their business’ day to day operations and prefer to outsource their accounts receivable department.

Factors can help your business deal with customers with poor payment histories due to their experience in collecting receivables. A good factoring company can help you make significant reductions in your losses due to non-payment by assisting you in analyzing the credit of your customers before you enter into a contract, accept a purchase order, start the work, or deliver goods.

Two Ways to Factor

Factoring can either be  recourse  or  non-recourse .  While both provide consistent cash flow, it is important to know the difference between the two before making a decision on how to fund your company’s working capital needs.

Recourse Factoring

A company that factors with recourse is one that works with a Factor that  lends against the accounts receivable using them as collateral to advance funds .  Typically recourse factoring requires the  personal guarantee  of management or the owners because the owners must maintain liquidity to purchase back any non-performing accounts receivable taken as collateral by the Factor.  The company is still ultimately liable for the invoices if they remain unpaid past their due date.  Any invoice that is non-collectible or in dispute is sold back to the company.  Recourse Factors can offer higher advances and lower factor fees when purchasing the invoices under recourse factoring facilities.

Non-Recourse Factoring

A Factor that executes an invoice purchase agreement with a company without asking the company to repurchase unpaid or past due accounts receivable is automatically non-recourse. In a non-recourse arrangement, the Factor assumes the credit risk and liability of non-payment on a factored invoice.  Non-Recourse Factors are often compensated differently for taking the credit risk away from the company.  Advance rates may be lower and factor fees may be higher when compared to recourse factoring.  Since the Factor is taking on more risk in a non-recourse transaction, to qualify the company’s customer, they must have an extensive history of prompt on-time payments and meet the credit requirements of the Factor.

Non-recourse factoring is the  best choice if you are risk-averse . However, it is important to know that not all factoring companies purchase accounts receivable on a non-recourse basis. 

• The most common type of factoring
• More flexible credit requirements
• More flexibility on advance rate
• You are responsible for failed customer payments
• Multi-year contracts required
• Minimum volume commitment
• Personal guarantee requirement
• Less common
• Factor assumes the risk of non-payment
• Slightly higher fees
• More stringent credit requirements
• Advance rate is generally lower than a recourse transaction
• No long-term contract
• No minimum volumes
• No personal guarantee

Understanding the Terms

When looking for a factoring company, it is important to research several competent factoring firms and compare their terms. This is an important step to take regardless of whether you are looking for recourse or non-recourse factoring. Consider working with a factor that provides both types of factoring. Some of your clients may make better candidates for recourse factoring than others.

Factors with a competent credit team can help your business deal with customers with poor payment histories. A good factoring company can help you make significant reductions in your losses due to non-payment by assisting you in analyzing the credit of your customers before you start the work or deliver goods.

How to Use Factoring for Cash Flow

Recourse Factoring involves pledging a company’s invoices in exchange for an immediate cash advance.  Any non-performing accounts receivable must be paid off by the company or the owners should the factor request payment of the non-performing accounts.  Nearly all factors are recourse to avoid the risk of unpaid accounts. Recourse factoring has several advantages for lenders. Lenders in this arrangement face minimal risks. The factor does not have to deal with risks of non-performing accounts receivable.

Many  lenders find recourse factoring more advantageous because the owners have provided them with a guarantee of payment  when accounts receivable becomes non-performing. On the other hand, the borrower faces greater risks because they are responsible for all uncollected payments.

Clients often find non-recourse factoring beneficial. However, this type of factoring requires the factoring company to absorb all the debts or uncollected invoices.   It is less risky for management because if they provide the service properly or deliver the product as agreed they do not have to repay the factor for non-performing accounts receivable like they would under a recourse factoring agreement.

Which Type of Factoring is Suitable for my Business?

There are advantages and disadvantages of both recourse and non-recourse factoring. In general, companies with creditworthy customers and strong balance sheets face less risk regardless of whether they choose recourse or non-recourse factoring. Every business is unique as far as dealing with collecting from customers. It is important to consider the benefits and drawbacks of both recourse and non-recourse when  factoring your invoices  to decide which will better meet your business needs.

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What Does Sales With Recourse & Without Recourse Mean?

When it comes to sales, "with recourse" is a legal term that means with subsequent liability, and "without recourse" means without subsequent liability. The sales agreement signed by the buyer and seller determines whether a sale is a recourse sale or a without recourse sale and thereby determines the respective rights and responsibilities of both parties.

Sales With Recourse

Sales with recourse means liability for the asset sold falls upon the seller. The seller of an asset bears responsibility for the nonperformance of the item. By selling the asset, the seller assumes the risk that the asset sold may be defective or does not perform as promised. By doing so, the buyer has the right to seek recourse from the seller. This means that the seller of the asset is obligated to make the buyer whole, either by reimbursing the buyer for the asset or offering a replacement of equal value.

For instance, if your small business sells small kitchen appliances and your customer purchases a toaster that does not eat evenly, you will probably need to issue them a refund or replace the product at no charge to them. You probably have something in your return policies or product warranties that lets your customer know that can seek this recourse should anything go wrong with their purchase.

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Binding sales agreements, sales tax recovery, how to get out of a business lease, example of a sales contract and buyout clause, the liability of a cosigner, no recourse: meaning.

According to Investopedia, sales without recourse means liability for the asset falls upon the buyer. Without recourse means that the buyer of the asset accepts the risk associated with the item. If the asset does not work as promised or is otherwise defective, the buyer has no recourse against the seller. The seller of the asset is under no obligation to replace the asset or refund the purchase price paid by the buyer. By purchasing the asset, the buyer agrees to accept the possibility of nonperformance as a potential outcome of the transaction.

For instance, a small furniture store might offer a section of mildly or moderately damaged furniture goods. These pieces are often sold "as-is," so that the customer cannot ask for a refund due to the small imperfections in the furniture. The customer buys the furniture with full knowledge of the imperfections and accepts the lower price as a trade-off, without the option to return the goods.

Real Estate Sales

When it comes to real estate sales, recourse has a slightly different meaning. According to NOLO, certain states are considered recourse states when it comes to mortgage loan agreements, which means the lender of a home loan can foreclose on the property, then seek recourse from the buyer for the loan value, even after the homeowner has lost the property. The lender will sell the property at auction. The difference between the price the lender receives for property and the amount owed on the loan is called a deficiency. The lender can sue the borrower for this deficiency amount. In states that have nonrecourse laws when it comes to mortgage loans agreements, the lender cannot sue the borrower for a deficiency.

Consequences and Judgements

If a lender obtains a judgment against a borrower in a recourse state, that lender can potentially seize money in the borrower's bank account, place a lien on other property that the borrower owns or garnish a portion of the borrower's earned wages, depending upon the laws of each state. Plus, the lender can pursue the borrower for many years. Each state has a statute of limitations on judgments. The length of this statutory period varies by state. In Florida, for example, the statute of limitations on judgments is 20 years from the date the court issues the judgment.

• Investopedia: Without Recourse
• NOLO: What's the Difference Between a Recourse and Nonrecourse Loan?

• Receivables
• Notes Receivable
• Credit Terms
• Cash Discount on Sales
• Accounting for Bad Debts
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• Bad Debts as % of Sales
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• Accounts Receivable Aging
• Assignment of Accounts Receivable
• Factoring of Accounts Receivable

Factoring of accounts receivable is the practice of transferring the ownership of accounts receivable to a company specialized in receivable collection, in exchange for immediate cash. In other words, the company that originally owns the receivables, sells them to another company called “factor” and receives immediate cash.

Factoring helps a business improve its cash flow by converting its receivables immediately into cash instead of waiting for the due dates of payments by customers. A drawback of factoring is that it is done at a discount, which means that the cash received on factoring of receivables is less than the value of the receivables transferred. This is because the factor expects a certain margin and it faces risks such as time value of money , and depending on the agreement, the risk of default by the debtors.

The parties to the factoring agreement assess the recoverability of the accounts receivable, decide whether or not the factoring agreement will be with recourse or without recourse, and then agree on a suitable discount factor to calculate the amount of fee to be charged by the factor i.e. the discount. After deducting such a fee from the value of the accounts receivable, the factor pays in cash to the originating company. The factor may also withhold an additional amount as a refundable security against any bad debts that may arise.

As a result of the above transaction, the factor gains ownership of the accounts receivable and has access to the detailed records of those receivables . The factor is specialized in receivable collection and it may actually be cost effective for businesses to factor their receivables because doing so will save costs such as wages paid to staff for following up with customers.

The factor collects cash from the debtors as the due dates approach. The procedure to be followed in a situation where a debt becomes irrecoverable, depends on whether or not the factoring agreement is with recourse.

Recourse vs non-recourse factoring

Under non-recourse factoring, the factor may set-off the sum retained as a security, if any, against any bad debts that may arise but the factor is not entitled to be reimbursed by the originating company if the total of bad debts exceed the amount of security. In other words, the additional loss on bad debts under non-recourse factoring is borne by the factor.

Under a factoring agreement with recourse, the company factoring its receivables agrees to pay bad debts in full to the factor. So if the security falls short of the total bad debts, the factor is entitled to be reimbursed for bad debts in full.

Non-recourse factoring is riskier than factoring with recourse for the factor, generally resulting in higher discount rates over factoring with recourse.

Factoring vs assignment of receivables

Factoring is different from a financing agreement involving assignment of receivables because the later uses receivables as a collateral security for a loan, but the actual ownership of the receivables and the right to collect them is not transferred as long as the loan and any related interest payments are paid in time.

The following example illustrates the journal entries to record transactions related to factoring with and without recourse:

On January 1, 20X5, Impatient Inc. factored its accounts receivable of $100,000 at a fee of 8%. Under the terms of the agreement, the company received $82,000 in cash and the rest of the amount was retained by the factor as a security for any bad debts that may arise. Any excess of this security sum over the total bad debts was agreed to be returned by the factor at the end of the accounting period i.e. December 31, 20X5.

On December 31, 20X5 the full amount of security sum was withheld by the factor because the actual bad debts totaled $11,000 exceeding the security sum.

Impatient Inc. had already provided allowance for doubtful debts in the factored accounts receivable and a bad debts expense was recognized in the income statement of year ended December 31, 20X4.

Required: Pass journal entries to record the above transactions for Impatient Inc. both under factoring with recourse and factoring without recourse.

January 1, 20X5: Here, the journal entry will be identical under both factoring with recourse and factoring without recourse.

December 31, 20X5: The journal entries will differ under the two types of factoring. Since the actual bad debts exceed the amount initially retained by the factor, Impatient Inc must pay the factor, an additional amount of $1,000 under factoring with recourse but there is no such remedy if the factoring is without recourse.

Under factoring with recourse:

Under factoring without recourse:

It is important to note that the type of factoring influences the amount of fee charged and the amount of security held by the factor and the scenario in this example is only for the purpose of comparing the two types. The amount of security retained may be zero under factoring with recourse because the agreement guarantees the factor that any debts that may turn out to be irrecoverable will be reimbursed.

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

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What is recourse and nonrecourse lease assignment.

The right of an assignee or buyer in a financial transaction to demand performance from the transaction assignor or seller in the event of default on the underlying debt is recourse .  Where a financial transaction is nonrecourse , its assignor or seller is not held liable for payment and performance in the event of default on the underlying debt.

Lease assignments may be with recourse, without recourse or with limited recourse of the assignees (funders) to the lessor in the event of lessee default on the assigned leases:

• Recourse assignment – The assignor is held liable to provide the assignee payment and performance of the underlying debt or to repurchase the assigned rights from the assignee upon occurrence of an event of default under the transaction;
• Limited recourse assignment – The assignor is liable to the assignee only for a portion of the remaining obligations of the underlying debt upon occurrence of an event of default under the lease, where the recourse amount normally decreases and eventually ceases after a certain period of time;
• Nonrecourse assignment – The assignor bears no liability toward the assignee for payment and performance of the underlying debt in the event of default on the transaction, where most lease assignments provide the assignees no recourse to the lease assignor.

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• How do lessees classify leases under ASC 840 and IAS 17?
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• How do lessees account for leases?
• How are leveraged leases accounted for under US GAAP?

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What Is Full-Recourse Debt?

Understanding full-recourse debt.

• Full-Recourse vs. Non-Recourse Debt

The Bottom Line

• Credit & Debt
• Debt Management

Full-Recourse Debt: What It Means, How It Works

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

A full-recourse loan holds you personally liable for the total dollar amount of a loan. In the event of a devaluation, the lender can use your other personal assets to offset the amount borrowed.

Full-recourse debt is a type of secured debt that gives the lender rights to assets—beyond just the secured collateral specified in the loan contract—to cover the full repayment of the borrower’s loan obligations if they default on the loan.

In other words, loans with full-recourse provisions offer lenders additional remedies to pursue 100% of the outstanding loan amount, including legal action.

Key Takeaways

• Full- and non-recourse debt are examples of secured loans.
• Full-recourse debt is common in the mortgage loan sector.
• Full-recourse debt gives the lender the right to seize assets beyond the specified collateral in case the borrower defaults on the loan.

When a borrower enters into a secured loan contract, the terms of the contract may be either full- or non-recourse. The provisions of a full-recourse loan give the lender rights to more assets than just the secured collateral specified in the contract.

Full-recourse debt mitigates risk for the lender. A lender may choose to integrate a full-recourse clause into the loan agreement if they believe that a secured asset likely will decrease.

Full-Recourse Loans and Mortgages

Full-recourse loan provisions are common in loan agreements that use a real estate property (i.e., mortgages ) as collateral. For example, if a borrower were to default on their mortgage loan, then that lender would want to seize the property and foreclose.

However, if the property's resale value does not cover the entire amount due to the lender, then—provided the loan contract had a full-recourse provision—full-recourse rights would kick in. So mortgage bankers generally add full-recourse clauses to their loan agreements to protect themselves from the risk of a drop in collateral value.

Full-Recourse Lender Rights

A full-recourse provision grants the lender the right to seize any additional assets that the borrower may own and use them to recoup the remaining amount due to them. Depending on the terms of the full-recourse loan, lenders could gain the authority to tap a borrower’s bank accounts, investment accounts, and wages.

For the lender, full-recourse debt is practically risk-free.

Full-Recourse  vs. Non-Recourse Debt

Full-recourse and non-recourse debt are associated with secured loans. The essential difference between a full-recourse and non-recourse loan has to do with the types of assets a lender can claim if a borrower fails to repay a loan.

Non-Recourse Debt

In contrast to full-recourse debt, non-recourse debt does not give a lender any rights to additional assets if a borrower defaults on a secured loan. In a non-recourse mortgage loan, the lender would not have rights to any assets beyond the real estate collateral.

Thus, non-recourse debt presents some collateral risk for the lender, as there is a chance that the collateral value could fall below a borrower’s repayment value. However, as a mortgage loan progresses, the collateral risk will decrease for the lender because greater portions of the loan will be paid off.

That the collateral value may decrease is usually an important risk consideration in the underwriting process . This risk is one reason that lenders typically have a loan-to-value ratio threshold for the amount of principal that they will issue to a secured borrower. Most lenders usually require a loan-to-value ratio of no more than 80%. Higher ratios can be approved but will typically require primary mortgage insurance (PMI).

Failing to repay either a full-recourse or non-recourse debt can have serious financial consequences. If you're struggling with your loan payments, then one of the  best debt relief companies  or  credit counseling agencies  might be able to help you circumvent the worst possible outcomes.

What Other Types of Assets Are at Risk in a Full-Recourse Loan?

Every loan agreement is different, and the types of assets that may be vulnerable should be outlined in the agreement. Typically, the lender could tap into personal bank accounts, investment accounts, or real estate to recover their investment.

What Types of Loans Are Most Often Full-Recourse loans?

Most full-recourse loans are secured by real estate. Mortgages are the most common type of full-recourse loan.

Are Non-Recourse Loans Unsecured?

Both full and non-recourse loans are secured by collateral. However, if the value of the property has decreased, a full-recourse loan will require the borrower to pay back the full amount borrowed, including unpaid interest and fees, even if the property is no longer worth the original amount.

Full-recourse loans are a big win for lenders but can be very risky for borrowers. If you purchase a property in a volatile market, you may have to dip into your personal accounts to cover the cost of the property when the market value drops. Read any full-recourse loan agreements very carefully to find out what assets are fair game in the event of a devaluation.

Internal Revenue Service. " Recourse vs. Nonrecourse Debt ."

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