Structuring Asset Backed Debt Facilities against Concentrated Debtor Ledgers in High Growth Markets
Credit insurance and cash sweeps convert risky concentrated debtor ledgers into eligible asset-backed collateral pools.
Trade Credit Assignment
Meaning
Legal transfers move the right to receive payment from a commercial invoice from the original seller to a third party financier. A trade credit assignment allows a supplier to receive immediate cash in exchange for the future payments owed by their customers. This transaction is a common feature of factoring and supply chain finance programs.
It remains in effect until the customer pays the invoice in full to the new owner of the debt.
Right Transfer
The core of a trade credit assignment is the sale of a financial asset, which is the legal right to collect money. Once the document is signed, the original seller no longer owns the debt and cannot legally collect the payment for their own use. This transfer must be documented clearly to ensure that the new owner has the standing to sue for payment if necessary.
The validity of the assignment is often dependent on the terms of the original sales contract.
Payment Direction
Customers are usually instructed to send their payments to a new bank account after a trade credit assignment has taken place. This change in payment direction is often communicated through a formal notice of assignment. If a customer ignores this notice and pays the original seller, they may still be liable to the financier for the debt.
Ensuring that the payment reaches the correct party is the most critical operational step in the process.
Notification Requirement
Whether a trade credit assignment is disclosed to the customer depends on the specific agreement between the seller and the financier. In a disclosed assignment, the customer is told exactly where to send the money and who now owns the debt. In a non-disclosed version, the customer continues to pay as usual, and the seller forwards the funds to the financier.
The choice between these methods impacts the cost of the financing and the level of control the financier maintains.