What it means
An assignment moves the benefit of a contract, meaning the right to receive payment, without moving the burden, meaning the obligations the original creditor still owes. That is the essential difference from a novation, which tears up the old contract and replaces it with a new one and therefore needs every party to agree.
Businesses assign debt to convert slow receivables into cash today, to tidy a balance sheet ahead of a sale, or to hand collection to a party better equipped to pursue it. Banks do it constantly, packaging loans and selling the rights on to investors who want the income stream.
Mechanically it requires a written assignment agreement and, in most legal systems, written notice to the debtor. Until that notice arrives, a debtor who pays the original creditor in good faith is normally treated as having paid properly, which is why notice is the step lawyers refuse to skip.
Pricing is where the commercial interest sits. Assigned debt almost always changes hands below face value, and the size of the discount reflects how likely collection is, how long it is expected to take and what chasing it will cost.
Two nuances catch people out. Many contracts contain anti-assignment clauses that prohibit transfer or require the debtor's consent, and an assignment can be absolute or made only by way of security, in which case the debt reverts to the original owner once the underlying loan is repaid.
In practice
Real-world examples.
Example
An engineering contractor completes a $2,000,000 project and assigns the final $600,000 payment certificate to its bank at a 4% discount. It receives $576,000 immediately, which funds the mobilisation costs on the next contract rather than waiting out the client's 120-day payment cycle.
Example
A regional bank sells a portfolio of performing car loans to an insurance company, assigning the right to the monthly instalments. Borrowers receive a notice telling them where to send payments, and their interest rate and term stay exactly as they were.
Example
A software firm being acquired assigns several disputed customer balances to a specialist recovery firm before completion. The buyer gets a cleaner receivables ledger, and the seller gets an immediate, if reduced, cash sum for balances it did not want to argue about after the deal closed.
Formula
Calculation
Assignment discount = face value - price paid
Discount rate = assignment discount / face value
Assignee return over the collection period = assignment discount / price paid
A distributor holds $500,000 of trade receivables due in 90 days from a spread of creditworthy retail customers. It assigns the whole book to a finance company for $470,000 in cash today.
The discount is $500,000 - $470,000 = $30,000, which is a discount rate of $30,000 / $500,000 = 6% of face value.
For the assignee, the return over the 90-day collection period is $30,000 / $470,000 = 6.38%. With four such 90-day cycles in a year, the simple annualised return is 6.38% x 4 = 25.5%, before deducting the cost of chasing payment and any losses.
For the assignor, the trade-off is straightforward: it gives up $30,000 of income to receive $470,000 today rather than $500,000 in three months, which is a sensible bargain if that cash prevents more expensive borrowing.
The risk sits with whoever bears the loss. If the assignment is without recourse and only $455,000 is ultimately collected, the assignee's result is $455,000 - $470,000 = -$15,000, a loss of $15,000. If it is with recourse, the assignor must make up the $45,000 shortfall against face value, and the assignee still earns its $30,000.Case study
Seen in the real world.
The following is an illustrative and fictional scenario. Trellis Medical Supplies, an invented distributor of clinical consumables, had $500,000 of receivables sitting with hospital groups that habitually paid at 90 days rather than the contracted 45, and it needed cash to fund a bulk purchase at a supplier discount.
Trellis assigned the whole $500,000 book to a finance house for $470,000, giving up $30,000. The bulk purchase saved $52,000 against normal pricing, so the arrangement was $22,000 better than doing nothing, and the finance house earned a 6.38% return over the three months it took to collect.
The complication surfaced afterwards. One hospital group's supply contract contained an anti-assignment clause, and its $85,000 balance had to be carved out of the deal and left with Trellis. The fictional lesson was that assignment is a legal transaction before it is a financial one, and reading the underlying contracts should come before agreeing a price.
Watch out
Common mistakes.
- Assuming assignment releases the original creditor from its own obligations. It transfers the right to be paid, not any duties still owed under the contract, and only a novation does both.
- Skipping formal notice to the debtor. Without notice the debtor can keep paying the original creditor and be legally discharged, leaving the assignee to chase money that has already gone elsewhere.
- Ignoring anti-assignment clauses buried in the underlying contract. An assignment made in breach of one can be ineffective, which means the buyer has paid for a right it does not hold.
Questions
People also ask.
Does the debtor have to consent to an assignment?
Generally not, unless the contract says so, because the debtor's position is unchanged in amount, timing and terms, but they must be told where to pay.
What is the difference between assignment with and without recourse?
With recourse, the assignor must cover any shortfall if the debtor fails to pay, whereas without recourse the assignee absorbs the loss and prices the discount accordingly.
How does assignment differ from factoring?
Factoring is a particular commercial arrangement built on assignment of trade receivables, usually as an ongoing facility with services attached, while assignment is the underlying legal mechanism that can apply to any debt.
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