An assignment of claims is the transfer of the right to claim from one creditor to another. This enables a small business owner to transfer an unpaid invoice to a lender creating an invoice factoring transaction. The transaction may be governed by the Assignment of Claims Act, which outlines the rights and obligations of each party in the event of a transfer.
How Assignment of Claims Applies to Factoring
In an invoice factoring transaction, a business sells its receivable to a factoring company for immediate funding. This means that the right to collect on the receivable gets passed on to the factor. This is where the notice of assignment comes in; it is the document that certifies the factor as the new owner of the invoice.
However, it is a slightly different matter when a factor purchases a receivable that has a federal agency as the debtor. When this happens, the factor becomes obligated to comply with the Assignment of Claims Act of 1940, which requires certain conditions be met before it can acquire the right to collect on the receivable.
A factoring must comply with the Assignment of Claims Act if:
- The contract specifies payments aggregating $1,000 or more
- The assignment is made to a bank, trust company, or other financing institution, including any federal lending agency
- The contract does not prohibit the assignment
What Small Business Owners Need to Know
Small business owners will need to sign an assignment of claims to transfer ownership of the invoice to an invoice factoring company. The federal regulations may affect the services that a factoring company offers since not every lender will factor federal invoices. It’s important to understand that, once both parties sign the agreement, the invoice is transferred and the right to collect on the invoice is transferred with it.
The assignment of claims is required for the transfer of ownership over an invoice for a factoring transaction. For most small business owners, this entails the signing of a form that will shift the ownership and collections responsibility for outstanding invoices over to the factoring company. In the case of federal invoices, the process is more complicated for the factoring company, which will reduce the number of companies willing to accept the invoices.