Glossary / Funding and payment
Also known as: Purchase of receivables, true sale of receivables
A receivable purchase is a transaction where a buyer pays cash now for the right to collect money someone else owes later, such as an earned commission. Whether it is legally a true sale or a disguised loan depends on how the contract allocates risk.
A receivable is money owed to you that has not been paid yet. In a receivable purchase, you sell that right to payment to a buyer at a discount. Wikipedia's entry on Factoring explains that "the sale of the receivable transfers ownership of the receivable to the factor," which separates it from borrowing where the receivable only serves as collateral.
Commercial law recognizes these sales directly. Under UCC section 9-109(a)(3), Article 9 of the Uniform Commercial Code applies to "a sale of accounts, chattel paper, payment intangibles, or promissory notes," with exclusions in 9-109(d), for example for an assignment made only for collection. How a particular commission right is classified under the UCC depends on the facts and state law.
For a leasing broker, an earned but unpaid commission can function as a receivable: the landlord owes it, and it will be paid on a future date set by the Commission agreement. Selling it converts a future payment into cash today, at a discount.
Whether the deal is truly a sale affects your risk. A Crowell & Moring client alert on court decisions explains that labels alone do not settle it: "simply designating a transaction as a 'sale' does not change the nature of the transaction." Courts look at who bears the credit risk, and the alert notes that if credit recourse is allocated to the seller or guarantors, a court is more likely to call it a secured loan. In plain terms, if you must repay when the landlord does not pay, the arrangement looks more like debt. Rules vary by state and by contract, and this is not legal advice.
Judge a receivable purchase by its recourse terms, not its name: if the risk of nonpayment comes back to you, treat it as borrowing.
