The transfer of credit is an operation through which a company in order to obtain sufficient liquidity to allow the proper functioning of its activity, decides to assign the rights of collection of the debts of which it is a creditor, to a third party (who usually a financial entity).
In this operation there are two participants:
- The transferor: that would be the company that transfers the right of collection to a third party in order to obtain immediate liquidity
- The assignee: That is usually a financial entity that buys that collection right after discounting a commission and applying a specific interest rate
Credit transfer with notification or without notification?
The assignment of credit can be done in different ways:
In this case, the transferor and the assignee agree to notify the debtor that the payment of the receipt or invoice will be effective upon expiration of the transfer of ownership. In this way, when it is time to pay, you will go directly to the new creditor
It would be exactly the opposite case to the previous one. The assignor and assignee carry out the loan assignment operation without notifying the debtor of the execution. If it is done in this way, it may happen that when the time of payment arrives, the debtor will make his debt effective with the assignor, that is, with the first creditor, ignoring the current creditor who is the one to whom it has been transmitted the right of payment.
It can become a double-edged sword because if this happens, it is considered that the debtor has settled his obligation and it will have to be the financial entity that has to go against the transfer to make the collection.
Credit transfer with recourse or without recourse?
This is another of the decisions that must be taken when a credit transfer operation between the transferor and the assignee is formalized. Is it done with recourse or without recourse?
The transfer of credit without recourse is when, for example, the company has an invoice pending collection within 60 days and, as it needs immediate liquidity, it goes to a financial entity with the objective of advancing the amount of said invoice.
In the event that the entity agrees, and if it is decided to do without recourse, this means that if at the time of collection of the invoice the debtor does not pay the corresponding amount, the transferor will be exempt from any responsibility and will be the financial entity that will have to deal directly with the debtor.
It would be the opposite of the previous example. In the event that at the time of payment of the debt the debtor does not face the same, the transferor will respond jointly and severally for this insolvency, therefore the financial entity may go against both to make the payment effective.
In general, financial institutions know how to cover their backs in this type of operations very well, even signing other kinds of documents that guarantee the payment of the debt by the assignor in the event that the debtor does not respond. The transfer without recourse is a not very typical operation among the classic banking entities.