Optional preservation of the receivables: Overview, definition, and example
What is optional preservation of the receivables?
Optional preservation of the receivables refers to a provision in a financial or contractual arrangement that allows a party (typically the seller or lender) to choose to retain the right to collect payments or maintain ownership of certain receivables (accounts receivable or debts owed) for a specified period, even after transferring or assigning the receivables to another party. This provision can be used when the party transferring the receivables (such as a business) wants to preserve the receivables in case they become more valuable in the future or in situations where the purchaser may not wish to assume the collection of those receivables immediately.
For example, a business might sell a portion of its receivables to a financial institution, but with an optional provision allowing the business to retain the right to collect certain receivables, depending on the circumstances, for a specified period.
Why is optional preservation of the receivables important?
Optional preservation of the receivables is important because it provides flexibility for the party transferring the receivables. By retaining the ability to collect certain debts, the business may be able to manage cash flow more efficiently or benefit from potential future increases in the value of the receivables. This option can be particularly useful in cases where the seller wants to minimize immediate collection risks, maintain control over certain accounts, or maximize returns from the receivables over time.
For buyers or lenders, optional preservation allows them to avoid taking on the immediate responsibility of collecting certain receivables while still benefiting from the transfer or assignment of the underlying assets. This flexibility makes the transaction more attractive to both parties and can help manage risks more effectively.
Understanding optional preservation of the receivables through an example
Imagine a company that is experiencing a temporary cash flow issue and decides to sell a portion of its receivables to a factoring company. However, the company includes a provision that allows them to preserve the right to collect certain receivables that are deemed more stable or secure. This gives the company an opportunity to retain control over high-value receivables, which may offer a higher return, while still obtaining immediate cash by selling the others.
In another example, a business sells a batch of accounts receivable to a bank but includes a clause that allows the company to optionally preserve some of the receivables, particularly those linked to long-term clients who have a history of timely payments. This preserves their ability to manage key accounts directly and ensures that they retain certain assets that are expected to bring in future cash flow.
An example of an optional preservation of the receivables clause
Here’s how an optional preservation of the receivables clause might appear in a contract:
“The Seller retains the option to preserve the right to collect the Receivables listed in Schedule A of this Agreement. The Seller may, at its discretion, maintain the right to pursue collections on these Receivables for a period of [X] months following the Transfer Date. Any Receivables not retained by the Seller will be transferred to the Buyer as per the terms outlined in this Agreement.”
Conclusion
Optional preservation of the receivables is a provision that allows the transferring party to retain the right to collect certain receivables, providing flexibility and control over the management of outstanding debts. This provision can benefit both the seller and buyer by allowing the seller to manage cash flow, mitigate risk, and potentially preserve high-value accounts, while still transferring the majority of receivables to another party. For businesses, it offers a strategic way to manage accounts receivable effectively in the context of financial transactions or asset sales.
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.