What is Assignment of claims?

With assignment, you transfer a receivable to someone else. You essentially sell the right to be paid. In practice, this happens in three ways.

The first is factoring. You sell your outstanding invoices to a factoring company that immediately pays a percentage of the invoice value. The factoring company then collects the receivable from your customer. This improves your cash flow but comes at a cost.

The second is financing. Banks accept receivables as collateral for credit. Through undisclosed assignment (without your customers knowing), you transfer receivables to the bank as security. If you fail to repay the credit, the bank may collect the receivables directly.

The third is transfer during a business sale. When selling a company, outstanding receivables are often transferred to the buyer as part of the transaction.

For a valid assignment, two things are needed: a deed (a written document recording the transfer) and a delivery act. For disclosed assignment, this means notification to the debtor. For undisclosed assignment, this means registration of the deed with the tax authority.

Important: some contracts contain an assignment prohibition. This means the receivable cannot be transferred without the debtor's consent. Always check this before entering into a factoring or financing agreement.

Assignment directly affects your company's cash flow. For SMEs with long payment terms, factoring can make the difference between being able to invest or not. But it also works the other way: if your supplier assigns their receivables from you, you suddenly have to pay an unknown party.

Research by CIPS shows that 80 per cent of invoices do not match the contract terms. When receivables are assigned while there is a dispute about the accuracy of the invoice, a three-way conflict arises between you, your original supplier and the assignee. A proper contract register in which payment obligations and any assignment prohibitions are recorded prevents these surprises.