Debt Transfer: Factoring or Assignment of Claims — Which Is Better for Your Business?

In today’s business environment, effective accounts receivable management is becoming increasingly important. When a company needs to transfer the right to collect a debt to a third party, businesses often choose between two legal instruments: factoring and assignment of claims (cession). Both mechanisms have their own features, advantages, and risks, so it is important to understand which option best suits your business needs.

What Is Assignment of Claims (Cession)?

Assignment of claims, also known as cession, is a legal transaction in which a creditor transfers its right to claim a debt to a third party. This mechanism is widely used in debt transfers, loan obligations, and other financial arrangements.

Key Features of Cession

• The transfer of the claim occurs directly between the original creditor and the new creditor.
• The debtor must be notified about the change of creditor.
• Cession usually does not involve advance financing from the assignee to the assignor, unless otherwise agreed by the parties.

What Is Factoring?

Factoring is a financial service that combines the transfer of receivables with financing. A factoring company purchases accounts receivable from a business and provides immediate financing, usually in the form of an advance payment based on the debt amount. The factor then independently collects the debt from the debtor.

Key Features of Factoring

• The transfer of claims occurs simultaneously with financing.
• The factor may assume the risk of non-payment in non-recourse factoring.
• Factoring services often include debt administration and collection support.

Main Differences Between Factoring and Cession

Cession

• Transfer of claims without mandatory financing.
• Non-payment risks usually remain with the original creditor unless otherwise agreed.
• Debt collection support is generally not included.
• Governed by a standard assignment agreement.

Factoring

• Combines transfer of claims with financing.
• The factor may assume non-payment risks.
• Includes debt management and collection services.
• Requires a specialized factoring agreement with detailed conditions.

Which Option Is Better for Business?

The answer depends on your business objectives.

If your company needs quick access to cash flow and wants to reduce non-payment risks, factoring is usually the better option. This is especially beneficial for small and medium-sized businesses that require additional working capital.

If your goal is simply to transfer the right of claim without financing and maintain greater control over debt collection, cession may be a more appropriate solution.

Legal Recommendations

• Clearly define all contractual terms.
• Conduct due diligence on the counterparty.
• Properly notify the debtor about the change of creditor.
• Involve legal professionals in drafting and reviewing agreements.

Both factoring and cession are effective debt transfer instruments, but the right choice depends on your business strategy, financial needs, and acceptable level of risk.

Specialists from the Ukrainian Bar and Real Estate Association can help you conduct legal due diligence, prepare agreements, and choose the most effective legal solution for protecting your business interests.