Issuing an invoice to a customer to pay for a service rendered is part of everyday business life. Transferring this debt to a third party, who will take charge of collection and charge a commission in the process, is just as common today, and this practice offers real advantages. The assignment of receivables offers companies practical advantages and financial security are worth considering. Let's take a look at the mechanism and the issues involved.
The 3 players involved in the assignment of receivables
When assigning a claim, you will always find :
- The assignor, i.e. a company that has issued an invoice and is transferring its receivable to a third party, usually a bank or a factoring company.
- The assignee, who recovers the debt, proceeds with collection and proceeds to collect the payment
- The assigned debtor, a customer of the assignor, who must pay his debt to the assignee on the agreed due date.
The assignment of receivables mechanism
Assignment of receivables is a mechanism for transferring obligations defined by article 1556 (paragraph 1) of the Civil Code, which allows a natural or legal person (the assigning creditor) to assign a receivable to another person (the assignee), usually in return for a commission corresponding to a percentage of the sum due. This third party (the assignee) will then take charge of collection (from the assigned debtor), enjoys all of the assignor's rights pertaining to the assigned claim and may bring a lawsuit to recover the claim. The debtor may not object, unless the debt has been stipulated as non-transferable, but he must have acknowledged or been notified of the assignment.
The assignment of a claim therefore makes the assignee the new creditor of the assigned debtor, who must then fulfil his or her obligations to this third party. Note that the assignment also concerns the guarantees attached to the claim: pledges[1] and surety bonds, for example. The creditor retains only one responsibility, which concerns the validity of the assigned claim (its existence and due date) - unless the assignee is aware of its uncertain nature and accepts it.
It should be pointed out that, although this applies in the vast majority of cases to inter-professional relations, in principle all receivables may be assigned unless otherwise provided by law. This may include private claims such as rent, life insurance, or even the assignment of wages when the bank deducts directly from income at source to repay a loan. We will concentrate here on the assignment of invoices issued by professionals.
The assigned claim must be certain, liquid and payable
Please note: In order to collect a debt through out-of-court settlement or through the courts, the debt in question must be:
- Certain, i.e. its existence cannot be contested by the debtor;
- Liquid, i.e. precisely measurable and quantifiable;
- Due on demand or with a specific due date, so that the assignee can collect it once the payment terms granted to the debtor have expired
These three conditions must be met if the assignee is to be entitled to send a formal notice of default, initiate amicable collection proceedings and, if necessary, take legal action.â
Why assign a claim?
There are several advantages to assigning your receivables. The first and most important is to be paid more quickly. But it's also a way of gaining better control over cash flow, while reducing and gaining greater visibility over collection times. The workload of our teams is also positively impacted. Relieved of the responsibility for collection means more time freed up for other activities
Assigning receivables has a cost, but it can also be a very useful way of guaranteeing a company's financial security. By including this cost in its margin, the company can protect itself against the risk of non-payment, without reducing its profits.
Assignment of receivables can be used on a case-by-case basis. Upstream, any company can aim to secure its customer receivables by having a solvency survey carried out by a specialist organisation, whose report will specify the financial health of the customer, potential payment incidents and provide a reliability rating (also known as score entreprise)
How do you formalise an assignment of receivables?
The assignment of a claim is a legal act which, to be valid, must be formalised in writing. The document must specify :
- The identity of the debtor,
- The amount due,
- The expiry date.
The debtor must be notified of the assignment of the claim, by registered letter or bailiff's deed for example, the important thing being that proof of this notification can be provided if necessary.
Distinguishing between assignment of debt and subrogation
Both concepts describe the possibility of transferring a claim to a third party. However, there are major differences between the two concepts:
- The principle of transfer, which takes place by means of a contract of sale in the case of assignment of a claim, whereas subrogation is an accessory to payment which takes place following a court decision or is based on a legal provision ;
- The creditor's consent, which must be obtained in the context of the assignment of a claim, but not necessarily for subrogation, particularly in the case of a conventional or legal subrogation;
- Limits on payment: in the assignment of a claim, the assignee may demand recovery of the entire claim, regardless of the amount paid. On the other hand, personal subrogation is commensurate with the payment and is limited only to the amount paid by the third party solvent to the subrogating creditor;
- Finally, the speculative nature, which exists in the case of assignment because the assignor is seeking a profit, but not in the case of subrogation, where the creditor is simply seeking repayment.
Assignment of receivables is a mechanism that can be useful for alleviating cash-flow problems or securing payment of an invoice. However, its cost should be compared with that of outsourcing debt collection, which saves time by entrusting this delicate task to a team of specialised professionals.
[1] Contract by which a debtor assigns an asset to guarantee a debt, with or without dispossession, as appropriate.
The information presented in this article is for informational and advisory purposes only. The service mentioned—namely, the assignment of receivables—is not part of Coface’s portfolio of services. The references included are intended to support readers’ research and understanding and do not constitute a commercial offer or a commitment by Coface to provide the service in question.
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