Assignment

An assignment is effectively a sale of a receivable. The assignment of a company's receivables can often serve as collateral for the company's credit.

Consignment can play an important role in the working capital financing of businesses. Such a case can be when the company is a supplier to, for example, a large retail chain or a car factory. In this case, the company's customers have a good creditworthiness and regularly have a large amount of receivables against these customers. This creates an opportunity for the company to secure its own working capital financing needs by selling outstanding receivables from its customers. Assignment is the sale of receivables that have not yet matured.

The assignment of trade receivables with good creditworthiness can also be considered as additional as collateral for a credit application. When taking out current assets financing, in addition to the company's owner's suretyship, the company can assign its customer receivables to the bank. The situation is similar with factoring. In the case of the latter, there is no need for guarantee, in which case the credit will only be secured by the assigned customer receivable.

In terms of its practical operation, the assignment is similar to the assumption of assumption of debt, which is a contractual "person exchange" solution. The seller of the product is the beneficiary of the trade receivable, who is also the borrower of a loan. The seller is replaced by the lending bank or factoring company, which finances the company's activities.

Let's say that a small enterprise regularly sells to one of the large retail chains. Let's also assume that this small company needs a loan in order to manufacture its product for the big chain. The bank's perception of large chains is generally better than that of the smaller companies that supply them with products. Therefore, the small company can offer the bank its trade receivables, i.e. its claims against the large chain, as collateral for the loan. 

In this case, the bank assesses the credit risk of the trade chain, and if it deems it good, it may take out a loan secured by assignment. Of course, this is worth it to the small enterprise that supplies the chain if the chain's credit risk is more favorable than its own, because then the credit will be cheaper for it. 

The collection is done by presenting all invoices issued to the commercial chain by the company to the bank. The bank immediately pays him a certain part of the value of the invoice as a purchase price advance. This amount is usually 90 percent of the net amount of the invoice. When the buyer (in our example, the large retail chain) pays, the purchase price advance and the interests related to the transaction, as well as other costs, are deducted from the amount received. This amount belongs to the bank, and the company's debt is also reduced by this amount. When the customer pays, the remainder of the amount received remains in the supplier's small company's bank account. 

The buyer's consent is not required for the assignment to take place. The assignment is always based on an agreement between the company and the creditor, the buyer will only receive a written notification. Staying with the example, the supplier's small company and the bank enter into a contract. The large commercial chain is only informed in writing about the conclusion of the agreement.

Concessions are often made by stipulating a right of recourse. This means that if the customer doesn't pay, the company has to pay for it. Returning to the previous example, if the large commercial chain does not pay, the small supplier company repays the amount to the bank. In the case of factoring, the small company is obliged to buy back the receivable from the factoring company.