What Is Assignment of Credits? Definition of Assignment of Credits, Assignment of Credits Meaning and Concept

What Is Assignment of Credits? Definition of Assignment of Credits, Assignment of Credits Meaning and Concept - Definition of assignment of credits consists of the transfer of accounts pending recovery. In other words, the entity that granted financing waives its right to collect in favor of a third party. The…

Definition of assignment of credits consists of the transfer of accounts pending recovery. In other words, the entity that granted financing waives its right to collect in favor of a third party.


The new creditor, in exchange for the powers received, pays a consideration to the original lender. This then benefits from an immediate cash inflow.


Suppose we request a loan from bank A. Bank A can assign its credit to another entity B. Therefore, the entity to which we pay the end is to B.


Participants in a loan transfer


The participants involved in a loan assignment are the following:

  • Assignor: Original creditor of the loan.
  • Assignee: New creditor who will be able to recover the financing.
  • Assigned: Debtor of the loan.

Main characteristics of the assignment of credits


The main characteristics of the assignment of credits are the following:

  • The consent of the debtor is not necessary to carry out the loan transfer.
  • It is useful when a company requires cash in the short term and cannot wait to recover the financing granted.
  • Some obligations cannot be transferred, such as maintenance rights. These must be paid only from parents to their minor children.
  • The price paid by the transferee depends on the present value of the financing. This is calculated using an interest rate that reflects the risk of the transaction.
  • If the transferred subject is delinquent in other institutions, for example, the probability of default is higher. Thus, a discount will be applied with a higher interest rate and the present value of the loan will be lower. The same happens when the debt is very long-term.
  • The transfer is usually formalized before a notary. In this way, the respective loan assignment contract is registered. The responsibilities assumed by the participants are detailed there.

Types of assignment of credits


The types of assignment of credits are two:

  • Without recourse: If the debtor declares insolvency, the assignor will be exempt from all liability. That is, the new creditor cannot claim the original lender for the borrower's default.
  • With recourse: If the debtor does not return the loan within the agreed terms, the assignor must respond to the assignee. In other words, there is a joint responsibility.

Example of assignment of credits


To understand how a loan transfer works, let's look at the following example. Suppose that a company has sold machinery for US $ 20,000, its payment due in 90 days (A supplier credit has been applied ).


Almost immediately after completing the transaction, as the company needs cash, it decides to transfer its collection rights. Thus, it agrees with the bank to recognize an equivalent annual rate of 7.5%.


To calculate the consideration to the transferor, we first find the quarterly interest rate (i):


i = (1 + 0.075) ^ (3/12) -1 = 0.0182


Then, the payment demanded by the original creditor will be:


20,000 / (1 + 0.0182) = US $ 19,641.646


It should be mentioned that a bank commission may also apply. Assuming that this is only 1%, the net income that the transferor will receive will be:


19,641.646 * 0.99 = US $ 19,445.23


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