Receivables purchase agreements explained

A receivables purchase agreement is the contract under which a seller assigns or sells trade receivables to a purchaser (a bank, factor or conduit) for immediate funding, with the agreement defining purchase price, eligibility, recourse, notices to debtors and what happens on dilution or default. It is the core document for factoring, invoice discounting and many trade receivables programmes.

Receivables purchase agreement and assignment law

The United Nations Convention on the Assignment of Receivables in International Trade (New York, 2001) addresses legal obstacles to receivables financing, including asset based lending, factoring, forfaiting, securitisation and project financing. UNCITRAL states that uncertainty about the legal regime applicable to assignment can leave bulk or future receivables assignments ineffective, impair enforceability against the debtor in another country, or confuse priority among competing claimants.

The Convention validates assignments of future receivables and bulk assignments, partially invalidates contractual limitations on assignment, enhances certainty on effectiveness between assignor and assignee and as against the debtor, and clarifies the law applicable to priority, with an optional substantive priority regime. Article 2 defines assignment as the transfer by agreement of all or part of or an undivided interest in the assignor's contractual right to payment of a monetary sum from a third person, and deems the creation of rights in receivables as security to be a transfer for Convention purposes.

The International Chamber of Commerce endorsed the Convention in 2014, citing member reports of financings reviewed or abandoned where national laws treated bulk or future assignments as ineffective. ICC welcomed validation of those assignments, clearer priority rules and modernisation of assignment law while protecting existing practices.

A receivables purchase agreement operationalises that assignment: it identifies the receivables or eligibility criteria, states whether the transfer is intended as an outright sale or as security, sets the purchase price or discount, and allocates recourse for credit risk, dilution, disputes and representations.

Recourse, non recourse and supplier credit context

Where the exporter has extended supplier credit to an overseas buyer, the resulting receivable can be sold under a receivables purchase agreement. Recourse structures require the seller to repurchase or make whole the purchaser if the debtor fails to pay for defined reasons. Non recourse structures transfer specified credit risk to the purchaser, subject to exclusions for disputes, fraud, set off and representation breaches.

The Berne Union describes short term trade credit insurance as protection against non payment by a foreign buyer due to insolvency or protracted default, often as supplier credit insurance between exporter and buyer. Insurance can sit alongside a receivables purchase so that the purchaser or seller holds cover on buyer risk. An export credit agency policy may be assigned or loss payee endorsed according to the programme documents.

Purchase programmes may be disclosed to debtors (notification factoring) or undisclosed (invoice discounting with collection still handled by the seller as agent). Notification affects who receives payment and how set off and discharge operate.

Programme architecture

Common features of institutional receivables purchase agreements include:

• eligibility criteria (ageing, currency, debtor location, concentration, exclusions for affiliates and disputed invoices)
• offer and acceptance mechanics for each receivable or for daily schedules
• conditions precedent including KYC checks, sanctions screening and perfection steps
• collection account control and waterfall
• repurchase events for ineligible or diluted receivables
• termination and wind down on facility trigger events

Where the purchase is secured rather than an outright sale, a security package may include a charge over receivables and accounts in addition to the purchase wording. Where a true sale is intended, documentation and conduct must align with sale characterisation under the relevant insolvency law, a topic developed in the companion true sale analysis for trade receivables.

Priority and competing claimants

UNCITRAL highlights priority conflicts among assignees, secured creditors and insolvency administrators as a core obstacle to receivables finance. The Convention's choice of law approach for priority, centred on the assignor's location for key issues, is designed to make competing claims more predictable for international programmes. Local perfection filings, notice requirements and anti assignment clause overrides remain relevant under both the Convention (where in force) and domestic law.

Bulk assignment of present and future receivables is particularly important for revolving purchase facilities that fund continuous trade flows rather than single invoices. The receivables purchase agreement must describe the portfolio with sufficient identification for the applicable law even when individual invoices are not scheduled at signing.

Dilution, disputes and collection

Dilution covers credit notes, returns, rebates, short shipments and other reductions of the face amount after purchase. Purchase agreements define dilution reserves and repurchase duties so that the purchaser is not left funding non existent net claims. Commercial disputes between seller and debtor can suspend payment even when the debtor is solvent; dispute repurchase is therefore distinct from credit default recourse.

Collection accounts should isolate purchased proceeds from the seller's general cash. Where the seller remains collection agent, daily sweeping, reconciliation rights and audit access protect the purchaser. Debtor notifications, where used, reduce the risk that the debtor obtains good discharge by paying the seller after assignment.

Sanctions, export controls and AML requirements apply to sellers, debtors and jurisdictions in the programme. Ineligibility triggers should catch newly designated parties and prohibited trade without waiting for a scheduled eligibility refresh.

Desk summary

A receivables purchase agreement is the assignment or sale contract that funds trade receivables against defined eligibility and recourse terms. UNCITRAL and ICC materials frame the cross border legal infrastructure for bulk and future assignments. Credit analysis separates debtor credit risk, seller performance and dilution risk, and perfection priority from the funding advance rate.