Everything You Need to Know About Assignment of Accounts Receivable

Don't let the unfamiliarity and legal jargon surrounding the assignment of receivables bore you. It's time to dig deeper and uncover its practical implications. How does it empower businesses to finance their working capital needs? In this article, we reveal the ins and outs of the assignment of receivables—the very foundation of Aria's groundbreaking embedded invoice financing model. Get ready to unleash the power behind it all!

1 – What Is the Assignment of Accounts Receivable?

Unlocking financing opportunities and bolstering the assignee's cash flow, the assignment of accounts receivable operates under the regulatory framework of the EU Assignment of Receivables Directive (Directive 2009/44/EC).

1.1 – Defining Debt Assignment, Assignee and Assignor

In compliance with the EU Assignment of Receivables Directive and corresponding UK legislation, debt assignment encompasses:

• The assignor: the creditor who is owed money by a debtor.
• The assignee: a third party taking on the role of the new debt owner.

Typically, the debtor is not directly involved in this transaction, so their explicit consent is not necessary. The contract comes into effect upon signing, and the transfer of ownership and enforceability against third parties is governed by European legislation. As the newly appointed creditor, the assignee is empowered to approach the debtor for collection of the assigned debt. This is done adhering to relevant European laws.

1.2 – Exploring the Spectrum of Assignment of Receivables

For a valid receivable assignment, a written contract between the assignee and the assignor is essential. The specific nuances and legal frameworks may vary across European Union nations.

1.2.1 – Traditional Assignment of Receivables

Under the umbrella of diverse national laws within the EU, this classic assignment type involves the transfer of a creditor's claim or payment rights to an assignee, who assumes ownership of the receivable. This can occur with or without a fee, often accompanied by a commission.

1.2.2 – Invoice Discounting

Subject to the national laws of each EU member state, invoice discounting comes into play. In this scenario, the creditor assigns their receivable owed by a debtor to a credit institution or financing company.

2 – Why Use the Assignment of Receivables for Your Business?

When it comes to the assignment of receivables, creditors have a compelling reason to explore this financial strategy. By assigning a receivable held against a debtor, the debt is settled by the assignee instead of the assignor. Let's dive into the two scenarios and understand their impact.

2.1 – Assignment of Receivables: Fueling Cash Flow for Creditors

For businesses aiming to sustain and grow, timely payment to suppliers is crucial, even if their customers settle their invoices later.

2.1.1 – Working Capital Requirement (WCR): The Lifeline of Business Operations

The Working Capital Requirement (WCR) is a vital measure that captures financial needs for day-to-day operations. Managing working capital requirements is a critical challenge faced by service providers, freelancers and SMEs. While WCR management is crucial for businesses of all sizes, it holds even greater significance for small enterprises. This represents the time gap between paying suppliers and receiving payments from customers.

To navigate this challenge, businesses have options. Defaulting on supplier debts is not an option due to legal payment deadlines and the risk of damaging vital relationships with marketplaces or tech platforms.

2.1.2 – Unlocking Cash Flow Potential Through Accounts Receivable

Accounts receivable hold immense value and can be harnessed as an asset by assigning them to a third party—the assignee. Here's the process:

1. The assignee offers financing after conducting a risk assessment and solvency evaluation, sometimes requiring collateral for security.
2. The company assigning its receivables receives an upfront payment from the assignee, empowering them to settle payments with service providers.
3. The assignee is responsible for collecting the invoice amount from the customer.

2.2 – Shifting the Burden: Repayment Through the Assignment of Accounts Receivable

Another scenario arises when a company has a contract and procures materials from a supplier, resulting in an outstanding debt. The company has already invoiced its client, receiving an advance payment for the project, creating a receivable.

To alleviate the burden of supplier debt, the company assigns its client receivable to the supplier. Now, the assignee, the supplier collects payment for the assigned receivable (the advance payment for the contract) from the client. The client’s solvency becomes the supplier's concern as they assume ownership of the receivable.

3 – Aria’s Strategic Use of the Assignment of Receivables in Embedded Invoice Financing

Aria, a cutting-edge FinTech company, is revolutionising supplier invoice handling with instant financing solutions.

3.1 – Seamlessly Integrate Invoice Financing Into Your Application via API

Through Aria's powerful API, clients can effortlessly integrate financing directly into their web apps. This means that users of marketplaces, specialised SaaS platforms, or tech companies can enjoy instant invoice payments with a single click.

This B2B Buy Now Pay Later (BNPL) operation, where Aria provides upfront payment to suppliers, is made possible through a receivable assignment contract. To ensure risk management, Aria assesses the creditworthiness of its clients' customers.

3.2 – Assignment of Receivables: The Gateway to Cash Advances

Aria's approach to receivable assignments varies based on the business model and cash flow requirements of its clients. This is detailed in the general terms of receivable assignments.

3.2.1 – The Assignment of Receivables for Tech Companies or Specialised SAAS to Subcontractors

In this scenario, the receivable assigned to Aria corresponds to the invoice issued by Aria's client company to its own customer.

3.2.2 – The Assignment of Receivables for a Commission-Based Marketplace

In the scenario of a commission-based freelancer marketplace, Aria's client doesn't directly handle the sale of freelancer services. Instead, freelancers hold direct receivables from end customers. However, the marketplace strives to promptly compensate its service providers to foster loyalty. Aria steps in as the assignee of the receivable between the freelancer (assignor) and the end customer.

One-off receivable assignments provide a straightforward solution when online service companies require prompt payment from their service providers. By leveraging embedded invoice financing, marketplaces, tech companies, or SaaS platforms can elevate their service offerings and enhance the user experience for both buyers and sellers. If you're eager to explore how our financing works, there's no better way than to speak with our experts!