What it means
Assignment separates the benefit of a contract from the person who originally earned it. If a supplier is owed $80,000 by a customer, that right to be paid is an asset, and it can be sold or pledged to a bank in the same way as a piece of equipment.
Once assigned, the assignee steps into the assignor's shoes for the purpose of collecting. The distinction between rights and obligations is where most confusion arises.
You can generally assign the benefit of a contract, such as the right to receive payment, but you cannot simply hand your duties to somebody else and walk away. Transferring obligations requires novation, which replaces the original contract with a new one agreed by all parties, and that always needs the counterparty's agreement.
Assignment shows up constantly in business finance. Invoice discounting and factoring both rest on assigning receivables to a funder, lenders take assignments of rent, insurance proceeds and key contracts as security, and business sales transfer customer agreements to the buyer.
Commercial leases are another everyday case, where a tenant assigns the remaining term to a new occupier. Contracts often restrict the process, and those restrictions bite.
Many agreements contain a clause requiring written consent before assignment, sometimes with the qualifier that consent must not be unreasonably withheld, and an assignment made in breach of that clause can be ineffective or a breach in itself. Checking the assignment clause is the first step in any transaction that depends on transferring contracts.
The mechanics also matter for priority and enforcement. A legal assignment usually requires written notice to the party who owes the money, and until that notice is given the debtor can safely keep paying the original creditor.
In lending, registering the assignment where a public register exists is what protects the lender against a competing claim from another financier.
In practice
Real-world examples.
Example
A retailer wants to leave a shop with four years left on the lease and assigns the lease to another retailer. The landlord consents in writing but requires the outgoing tenant to guarantee the new one for the first two years. The original tenant is not fully free of the property.
Example
A software vendor sells its customer support division and assigns 300 maintenance contracts to the buyer. Twelve of those contracts contain clauses prohibiting assignment without consent, so those customers are approached individually. The sale price is adjusted for the ones who decline.
Example
A haulage firm assigns its trade receivables to a bank as security for a working capital facility. Customers are notified to pay into a designated account controlled by the bank. When the firm later seeks a second lender, the earlier assignment blocks any competing claim on the same invoices.
Formula
Calculation
Cost of assigning receivables = Service Fee + Interest on Advance, where Interest = Advance x Rate x (Days / 360)
Halstead Packaging assigns $500,000 of invoices to a finance provider under a receivables facility. The advance rate is 80%, the service fee is 1.5% of the face value, the interest rate on the advance is 9% a year, and the invoices are expected to be paid in 45 days.
Cash advanced today = $500,000 x 0.80 = $400,000.
Service fee = $500,000 x 0.015 = $7,500.
Interest = $400,000 x 0.09 x (45 / 360) = $4,500.
Total cost = $7,500 + $4,500 = $12,000.
That is $12,000 / $400,000 = 3% for 45 days. Annualising it, 3% x (360 / 45) = 3% x 8 = 24% a year. The headline 9% interest rate looked cheap, but the service fee charged on the full face value is what makes the real cost of assigning receivables so much higher.Case study
Seen in the real world.
Cobblestone Print Co is an illustrative, fictional commercial printer used to show assignment as a funding tool. It regularly waited 60 days for payment from publishing clients while paper suppliers demanded settlement in 30, and the resulting squeeze meant it was turning down orders it could otherwise have taken.
The company entered a receivables facility and assigned $250,000 of invoices to a funder, receiving an 85% advance of $250,000 x 0.85 = $212,500 within two days, against a service fee of $250,000 x 0.02 = $5,000 plus interest for the period the money was outstanding. Notice of assignment was printed on every invoice so customers paid the funder directly.
Two complications emerged, both instructive. One large publishing client had a clause in its supply agreement prohibiting assignment without consent, so those invoices had to be excluded from the facility until consent was obtained. And because the customer relationship still sat with Cobblestone, the finance director had to keep chasing payment personally, since assigning the right to be paid does not assign the goodwill needed to collect politely.
Watch out
Common mistakes.
- Believing that assigning a contract removes your obligations under it, when only novation with the counterparty's agreement can transfer duties as well as rights.
- Assigning without checking the contract's assignment clause, which frequently requires written consent and can render the transfer ineffective.
- Forgetting to give the debtor written notice, which leaves them free to keep paying the original creditor and undermines the assignee's position.
Questions
People also ask.
What is the difference between assignment and novation?
Assignment transfers rights only and generally does not need the other party's consent, while novation replaces the whole contract and requires everyone to agree.
Can a landlord refuse to allow a lease assignment?
Usually only on reasonable grounds if the lease says consent must not be unreasonably withheld, and landlords commonly require a guarantee from the outgoing tenant instead of a flat refusal.
Does assigning receivables mean the customer knows about it?
Under disclosed facilities such as factoring the customer is notified and pays the funder, while confidential invoice discounting keeps the arrangement private and the seller continues collecting.
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