This document is a lending agreement between
transferee and transferor, whereby the transferee assigns accounts receivable
to the transferor. In exchange for this assignment of accounts receivable, the
transferee receives a loan for a percentage of the accounts receivable.
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It
is common practice for companies with liquidation issues or those that want to
be paid against accelerated terms to transfer, in part or in full, their
accounts receivables as security in order to secure a loan. This happens in all
industries. What type of impact can this have on you and your company?
First
let's understand what route this contractor may take.
In the transfer and assignment of accounts receivable
financial institutions will analyze the accounts receivable aging report and
for each invoice that qualifies the transferee generally receives a percentage
of the outstanding balance in liquid. With some transferees however, the transferor
may have to transfer all of its receivables or specific receivables as
collateral to secure a loan. The benefit of this arrangement is that the
transferor retains ownership of the accounts as long as they make the loan
payments and the transferee deals directly with the transferor. Customers may
never know the transferor borrowed money against their outstanding accounts.
Let
us say construction ‘company A’ is contracted by ‘company B’ and requires a
secured loan, so they decided to transfer ‘company B’s accounts receivable in
order to get the loan and complete the project for ‘company B’. You might think
that the project owner or developer (Company B) should not care that ‘company
A’ transferred their accounts receivable as long as they keep working. However,
it can have an impact because lending institutions require payment to be made
directly to them. Presuming that the project has a construction loan, lending
institutions will not simply grant a loan to an unknown company that has not
been pre-approved by them. In addition, lenders and project owners generally
will not make payments without receiving a lien waiver from the payee, which
the company may not be able to provide. So, if the lender does not fund, then
‘company A’ may have a basis to stop working which may delay the project.
This
can be avoided, or at the very least be discouraged, by having the proper
language in the transfer and assignment of accounts receivable contract. In
most cases the problem is that ‘company A’ is assigning the agreement it has
with ‘Company B’ to the financial/lending institution. Most contract adequately
protect against this by stating that the contract cannot be transferred without
the consent of the owner. Sometimes, however, this is not enough because as
described above, the contract itself is not being assigned or sold, only the
receivables.
I
have seen some contracts use words such as: "Neither party to this
Agreement shall assign the Agreement without written consent of the other"
this may not prevent a ‘Company A’ from assigning the accounts receivable.
A
good contract uses a more specific language such as: "Contractor shall not
assign or transfer its interest in this Agreement or assign or transfer any
right it may have under the same or the proceeds payable hereunder or any part
hereof ..." these carefully constructed words not only prohibit the
transferrable of a contract but also protects certain interests found in the
agreement, which is better equipped in the event of unforeseen circumstances to
prevent against the transfer and assignment of the accounts receivable.
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absolute
absolute
ˈabsəluːt/
adjective
1.
not
qualified or diminished in any way; total.
"absolute
secrecy"
synonyms:
complete,
total, utter, out-and-out, outright, entire, perfect, pure, decided;
thorough,
thoroughgoing, undivided, unqualified, unadulterated, unalloyed,
unmodified,
unreserved, downright, undiluted, solid, consummate,
unmitigated,
sheer, arrant, rank, dyed-in-the-wool; plenary; peremptory
"there
was absolute silence in the house"
2.
viewed
or existing independently and not in respect to different things; not relative
or comparative.
"absolute
moral standards"
synonyms:
universal,
fixed, independent, non-relative, non-variable, absolutist;
rigid,
established, set, settled, definite, decided, irrevocable, unalterable,
unquestionable,
authoritative, incontrovertible, in black and white
"absolute
moral standards"
3.
noun
PHILOSOPHY
a
value or principle that is considered universally valid or which may be viewed
without relation to other things.
"good
and evil are presented as absolutes"
transfer
transfer
verb
transˈfəː,
trɑːnsˈfəː, tranzˈfəː, trɑːnzˈfəː/
1.
move
from one place to another.
"he
intends to transfer the fund's assets to the Treasury"
synonyms:
move,
convey, shift, remove, take, carry, fetch, lift, bring, bear, conduct,
send,
pass on, transport, relay, change, relocate, resettle, transplant, uproot
"the
plants should be transferred into a tank"
2.
change
to a different place, route, or means of transport during a journey.
"passengers
have to transfer at Heathrow for onward international flights"
3.
noun
a.
an
act of moving something or someone to another place, organization, team, etc.
"a
transfer of wealth to the EU's poorer nations"
synonyms:
movement,
move, moving, shifting, shift, handover, relocation,
repositioning,
transplant, redirection, conveyance, transferral, transference,
removal,
change, changeover, switch, conversion
"he
got a free transfer to a Spanish team"
b.
BRITISH
a
small colored image or style on paper, which can be transferred to another
surface by being pressed or heated.
accounts
receivable
accounts
receivable
noun
1.
money
owed to a company by its debtors.
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