Imagine that you have delivered goods or provided a service, issued an invoice, but your customer will not pay until a certain period has passed. In the meantime, you have to cover salaries, payments to suppliers, and other operating expenses, but the proceeds from the sale haven’t yet been credited to your account.
In such a situation, many companies begin looking for ways to improve their liquidity. Two of the most common terms in this context are assignment and factoring. Although they are often mentioned together, they have different legal natures and different practical purposes. In this article, we’ll explore what assignment and factoring are, what the main differences between them are, and when each of these tools might be suitable for your business.
What is an assignment?
Assignment is a legal transaction by which a claim is transferred from one creditor (assignor) to another creditor (assignee). In other words, one person transfers their right to receive payment from the debtor to another person. It is important to emphasize that the subject of the transfer is the claim, not the invoice. The invoice merely certifies the existence and amount of the claim.
Assignment is governed by the Obligations and Contracts Act (OCA). As a general rule, the debtor’s consent is not required for the conclusion of an assignment agreement. However, in order for the assignment to be effective against the debtor, the debtor must be duly notified of the transfer in accordance with the requirements of the law.
Assignment is a legal mechanism that can be used for various purposes:
- Transfer of receivables between related parties;
- Debt restructuring;
- Securing other transactions;
- Sale of receivables;
- Resolving complex commercial disputes.
Therefore, not every assignment is related to financing or improving liquidity. The specific economic effect depends on the terms of the transaction in question.
What is factoring?
Factoring is a financial service through which a commercial company can obtain earlier access to funds in exchange for its trade receivables arising from invoices issued with deferred payment terms.
Typically, a factoring agreement is entered into between:
- The supplier of the goods or services;
- The factoring company (the factor).
The debtor is the third party to the legal relationship who is obligated to make payment on the relevant claim.
As part of the factoring service, the factor may acquire the receivables, provide advance financing, administer the receivables, organize their collection, and assume a contractually defined credit risk under certain conditions. It is important to understand that there is no single universal factoring model. The specific terms depend on the contract and the type of service. Not all factoring arrangements are non-recourse, involve the assumption of credit risk, or include receivables management. The amount of financing and the eligibility criteria are determined on a case-by-case basis.
Factoring with and without recourse
Factoring with the Right of Recourse
Under this model, the factor has the right, under certain contractual conditions, to seek reimbursement of the financing provided from the supplier if the debtor fails to fulfill its obligation.
Factoring Without the Right of Recourse
Under this model, the factor may assume a contractually specified portion of the credit risk associated with the debtor’s default.
It is important to note that “without recourse” does not automatically exempt the supplier from all liability. For example, if the claim is non-existent, invalid, disputed, or if false information has been provided regarding it, the supplier may be held contractually liable regardless of the product’s trade name.
Assignment, Factoring, and Bank Loans—What’s the Difference?
Although factoring often uses assignment as a legal instrument for transferring receivables, the two concepts are not synonymous.
| Criterion | Assignment | Factoring | Bank Loan |
| Legal and Economic Function | Legal Mechanism for the Assignment of a Claim | A financial service related to the transfer and financing of receivables | Provision of Loan Funds |
| Main Objective | Assignment of a Claim | Earlier Access to Funds and Receivables Management | Securing External Funding |
| Subject of the Assessment | It depends on the specific transaction | The Receivable, the Debtor, the Supplier, and the Structure of the Transaction | The Borrower’s Creditworthiness and Collateral |
| Basis for Funding | The Specific Claim | Documented trade receivables and approved credit limits | Loan Agreement and Certain Terms and Conditions |
| Payment Source | The debtor pays the assignee after being duly notified | The debtor typically pays the factor in accordance with the contractual structure | The borrower repays the loan |
| Effect on Liquidity | It depends on the specific circumstances | It may provide earlier access to funds | Provides the agreed-upon amount of funding |
| Credit Risk | It depends on the terms of the transaction | It depends on whether the service is with or without recourse | As a general rule, the risk remains with the borrower |
When is an assignment more appropriate?
An assignment may be an appropriate solution when a specific claim is to be transferred, the parties are restructuring their relationship, an intra-group transaction is taking place, the primary purpose is not to obtain financing, or a legal mechanism is needed to transfer rights.
In such cases, the assignment often fully fulfills the required function without the need for a specialized financial service.
When is factoring a better option?
Factoring can be particularly useful for companies that regularly deal with deferred payment terms, issue commercial invoices to corporate clients, experience cash flow pressures, need working capital between delivery and payment, or are seeking an alternative source of liquidity.
For businesses with regular sales and a recurring need for working capital, factoring often offers a more flexible solution than traditional lending.
Example: Assignment or factoring for an invoice of 50,000 euros
Let’s consider Company “X,” which delivered goods to a customer and issued an invoice for 50,000 euros with a 60-day payment term.
- In the case of an assignment: Company “X” may transfer its claim to a third party for a specified price or in connection with another transaction. This may result in the immediate receipt of funds, but this is not a mandatory element of every assignment. The primary function remains the transfer of the claim itself.
- In factoring: Company “X” may offer to transfer the receivable—as evidenced by the invoice and related documents—to the factor. After conducting the necessary checks and accepting the receivable, the factor may provide an advance payment within the agreed percentage and approved limit. If, for illustrative purposes, we assume advance financing of 80%, the company would receive 40,000 euros before the due date. After the debtor makes the final payment, the factor makes the final settlement in accordance with the terms of the contract, deducting the financing already provided and any applicable fees, interest, charges, or other contractually owed amounts.
Note: The amounts and percentages listed are for illustrative purposes only. The actual terms depend on the specific transaction, the risk assessment, the borrower’s characteristics, the eligible receivables, and the terms of the relevant agreement.
How do you choose between assignment and factoring?
To determine which tool is best suited for your business, ask yourself the following questions:
- Do you need only a receivables assignment, or do you also need financing?
- Do you need earlier access to funds?
- Do you have a steady stream of sales invoices?
- Do payment deadlines create liquidity problems?
- Do you need help organizing and managing your receivables?
- Would you like to reduce your reliance on traditional credit products?
The answers to these questions will help you determine whether a simple assignment is sufficient or whether factoring can add additional value to your business.
Conclusion
Assignment and factoring are related but not interchangeable concepts. Assignment is a legal mechanism for transferring a receivable from one creditor to another. Factoring is a financial service that typically involves the transfer of receivables as part of a broader structure that includes financing, administration, and collection of receivables.
The specific impact of each transaction depends on the contractual terms, the type of service, the allocation of risk, and the characteristics of the relevant receivables. For companies that regularly deal with deferred payments, factoring can provide earlier access to working capital and more structured receivables management. When only a legal mechanism for transferring rights is needed, assignment is often a perfectly adequate solution.
If you’d like to learn more about financing options secured by accounts receivable, you can check out the FAQ section or apply directly through Smart Factoring’s digital platform.