Conveyance of receivables: Overview, definition, and example
What is conveyance of receivables?
Conveyance of receivables refers to the transfer or assignment of a company’s right to receive payment from its debtors to another party. This transaction typically involves selling or transferring accounts receivable (money owed by customers) to a third party, such as a financial institution or collection agency. The third party then assumes the right to collect the outstanding payments. This practice is often used in financing arrangements like factoring, where the business receives immediate cash flow in exchange for the receivables.
For example, a company may sell its outstanding invoices to a factoring company, which will then collect the payments from the company’s customers.
Why is conveyance of receivables important?
The conveyance of receivables is important because it allows businesses to convert outstanding debts into immediate cash flow, improving liquidity and enabling the company to meet its financial obligations without waiting for customers to pay. This can be particularly useful for businesses that need working capital for growth, inventory, or operational expenses but have a high volume of unpaid invoices.
For businesses, it provides a means of accessing capital more quickly and reduces the risk of bad debt. For the third party acquiring the receivables, it can provide a source of income through the collection process, though it also carries the risk of non-payment.
Understanding conveyance of receivables through an example
Imagine a small business that has $100,000 worth of outstanding invoices from customers but needs cash to purchase inventory for a new product launch. The business decides to convey (or sell) these receivables to a factoring company for $90,000. The factoring company now holds the right to collect the $100,000 from the customers, and the business immediately receives $90,000 in cash. This allows the business to continue operating without waiting for customers to pay.
In another example, a company may use a conveyance of receivables arrangement as part of a larger financing deal, where the company agrees to transfer a portion of its receivables to a lender as collateral for a loan. The lender may then collect the receivables as part of the repayment terms.
Example of a conveyance of receivables clause
Here’s how a conveyance of receivables clause might appear in a contract:
"The Seller agrees to convey to the Buyer all rights, title, and interest in the receivables listed in Exhibit A, including the right to collect any amounts owed by the Debtors. The Seller acknowledges that the Buyer shall assume full responsibility for collecting the receivables and that the Seller will receive the agreed-upon amount upon transfer of the receivables."
Conclusion
Conveyance of receivables is a financial practice that allows businesses to convert outstanding customer debts into immediate cash, facilitating smoother operations and improved liquidity. By selling or transferring the rights to collect receivables, businesses can access working capital and reduce the risk of non-payment.For businesses, understanding the conveyance of receivables can improve cash flow management and help finance growth, while for the third party acquiring the receivables, it offers a way to generate returns from collecting outstanding debts.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.