Agreement to Assign a Receivable: What You Need to Know
An agreement to assign a receivable is a legal document that allows a lender to transfer its rights to collect payment on a debt to a third party. This type of agreement is commonly used in financing transactions, where a borrower pledges its accounts receivable as collateral for a loan. In this article, we will explore what an agreement to assign a receivable is, how it works, and why it is important for businesses to understand.
What is an Agreement to Assign a Receivable?
An agreement to assign a receivable is a contract between a creditor, a debtor, and a third-party assignee. The creditor is the lender who is owed money by the debtor, and the debtor is the party who owes the debt. The third-party assignee is the party to whom the creditor assigns its rights to collect payment on the debt. The agreement outlines the terms of the assignment, including the amount of the debt, the interest rate, and the timing of payment.
How Does an Agreement to Assign a Receivable Work?
When a business borrows money from a lender, it often pledges its accounts receivable as collateral for the loan. Accounts receivable are the amounts owed to the business by its customers for goods or services that have been delivered or rendered. If the borrower defaults on the loan, the lender has the right to collect payment on the accounts receivable to satisfy the debt. However, the lender may choose to assign its rights to a third party if it wishes to sell or transfer the debt.
When the creditor assigns its rights to a third-party assignee, the debtor is notified of the assignment. The assignee then has the right to collect payment on the debt from the debtor. The debtor is required to make payments to the assignee until the debt is fully satisfied. The debtor’s obligation to make payments to the assignee is equivalent to its obligation to make payments to the creditor.
Why is an Agreement to Assign a Receivable Important?
An agreement to assign a receivable is important for several reasons. First, it allows a creditor to transfer its rights to collect payment on a debt to a third party. This can be beneficial for the creditor if it wishes to sell or transfer the debt. Second, it provides a mechanism for the debtor to make payments to the assignee, thereby ensuring that the debt is properly accounted for. Third, it protects the assignee’s rights to collect payment on the debt from the debtor.
In conclusion, an agreement to assign a receivable is a legal document that allows a creditor to transfer its rights to collect payment on a debt to a third party. It is important for businesses to understand the mechanics of this type of agreement, particularly if they are pledging their accounts receivable as collateral for a loan. If you are considering an agreement to assign a receivable, it is recommended that you consult with an experienced attorney to ensure that your rights are protected.