What it means
Most businesses sell on credit terms, which means the cash arrives thirty, sixty or ninety days after the work is done. Assignment of receivables closes that gap by letting the invoices themselves support a loan, so cash comes in when the invoice is raised rather than when it is settled.
The receivables stay on the borrower's balance sheet with a corresponding liability for the advance. Two variants exist and the difference is important.
A general assignment covers the whole receivables ledger as a floating pool, so the security shifts automatically as old invoices are settled and new ones are raised. A specific assignment names individual invoices, which gives the lender tighter control but requires more administration on both sides.
The lender advances only part of each invoice, commonly 70% to 85%, holding back a margin to absorb credit notes, disputes, early settlement discounts and slow payers. The borrower receives that holdback later, after the customer has paid and the lender has taken its interest and fees.
This is why the cash a business actually keeps is always less than the invoice face value. Cost has two layers that are easy to conflate.
Interest accrues on the advanced balance for as long as it is outstanding, while a service or administration fee is usually charged as a percentage of the total value assigned regardless of how quickly customers pay. A facility that looks inexpensive on interest alone can be costly once the service fee is included.
Because the assignment is normally with recourse, the borrower carries the bad debt risk. If a customer becomes insolvent, the borrower must still repay the advance, typically by substituting another invoice or paying the balance in cash.
That retained risk is precisely why the arrangement is accounted for as borrowing rather than as a sale of the receivables.
In practice
Real-world examples.
Example
A print and packaging firm assigns its entire sales ledger to a lender under a general assignment to fund a new press. Availability fluctuates each week as invoices are raised and settled, and the firm continues chasing its own customers so the relationship stays unchanged.
Example
An engineering subcontractor assigns three specific invoices totalling $280,000 from a single blue-chip client. Because that client has a strong payment record, the lender advances 85% rather than its usual 75%.
Example
A seasonal garden supplier assigns receivables each spring to fund stock purchases, then repays the facility over the summer as garden centres settle. The arrangement costs more than a term loan but only runs for the months it is needed.
Formula
Calculation
Cash advanced = Receivables assigned x Advance rate
Interest = Advance x Annual rate x (Days outstanding / 365)
Final cash to borrower = Collections - Advance repaid - Interest - Service fee
A wholesaler assigns $500,000 of invoices under an 80% advance rate, receiving $500,000 x 0.80 = $400,000 immediately. Interest is charged at 12% a year, and the customers take one month to pay, so interest is $400,000 x 0.12 / 12 = $4,000. The lender also charges a service fee of 1% of the assigned value: $500,000 x 0.01 = $5,000. When the full $500,000 is collected, the wholesaler repays the $400,000 advance, leaving $500,000 - $400,000 = $100,000, from which the $4,000 interest and $5,000 fee are deducted. The wholesaler ends up with $100,000 - $4,000 - $5,000 = $91,000, making total cash received $400,000 + $91,000 = $491,000.Case study
Seen in the real world.
Marlowe Textiles is an entirely fictional fabric supplier used here as an illustrative case. It sold to fashion retailers on 60-day terms while paying its own mills within 21 days, which left a persistent cash gap of roughly six weeks on every order.
Marlowe arranged a general assignment of its accounts receivable with a specialist lender, obtaining an 80% advance rate against an average ledger of $1,200,000. That produced around $960,000 of working capital, enough to cover mill payments without extending overdraft borrowing. Interest ran at 11% on drawn funds and a 0.9% service fee applied to assigned invoices.
Twelve months into the illustrative arrangement, one retailer entered administration owing $140,000. Because the assignment was with recourse, Marlowe had to repay that portion of the advance itself, which prompted the finance team to introduce credit limits per customer and to insure the largest accounts.
Watch out
Common mistakes.
- Confusing assignment of receivables with factoring, when assignment normally leaves collection and bad debt risk with the business rather than passing them to the funder.
- Budgeting for the full invoice value as incoming cash, when the advance rate means only 70% to 85% arrives upfront and the rest follows later.
- Comparing facilities on the interest rate alone and overlooking the service fee charged on total assigned value, which often costs more than the interest.
Questions
People also ask.
Do customers find out that receivables have been assigned?
Under a general assignment they often do not, because the business keeps collecting, though the lender may require notice on the invoices themselves.
Does assigning receivables remove them from the balance sheet?
No, because the business keeps the credit risk, the receivables stay recorded with the cash advance shown as a liability.
What happens to the holdback amount?
It is released to the business once the customer has paid in full and the lender has deducted its interest and fees.
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