Credit Transfer as a Payment Method
Before going into detail, we are going to explain what the credit transfer is. From there, we are going to detail how we can use it as a payment method.
What is the credit transfer?
With this example, it will be very clear to you what the transfer of credit is:
Currently, banks, financial institutions and telecommunication companies sell their debt to other firms known as Vulture funds. These firms are to collect debts and are the ones that execute credit transfer contracts.
And how do we apply this to a business between freelancers?
Imagine that you have a client who still has to pay you an invoice. They have another client who owes them. If your client offers to pay you by giving you the credit that is pending collection, there are several things that you should consider. Let’s go to the details…
Are you interested in a credit transfer as a payment method?
If you find yourself in this situation, and what you are interested in is getting paid, accepting may be an attractive solution. Especially if you see your client is not doing very well and there is less probability that you will collect the debt from him.
The best situation will be your client gives you a promissory note issued by the third party debtor or a bill of exchange accepted by them.
What happens if you have this type of document in your possession or not?
A double guarantee is created. That means if they don’t pay you, you can claim against the third party and against your own client who has assigned you the document.
However, if your client doesn’t have promissory notes or bills, follow a series of procedures so that the credit transfer goes smoothly:
- Before accepting the assignment, you must ask your client to give you the documentation related to the credit to verify its origin.
- If you accept the assignment, you shall sign a contract. Inside that document, you have to identify the transferred credit, its amount, the identity of the debtor, and the date of the assignment. In addition, you must receive all original documents from your client. It is also advisable to sign before a notary.
- Immediately notify the debtor of the credit transfer. You should tell them that now it is you who must receive the payment. This step is essential, since otherwise, that debtor will free himself from the debt by paying his previous creditor, claiming that he knew nothing about the assignment.
What if the debtor is insolvent?
As I have said before, your client will be responsible for the existence and legitimacy of the credit. But they will not be responsible for the solvency of the assigned debtor unless expressly agreed.
Thus, it is vital to verify the solvency of the new debtor before carrying out the assignment. Add a clause in the assignment document, whereby the assignor will take over the debt if the third party does not pay at the end.
The credit transfer has become a solution for banks and a lucrative prospect for investors. Investors can benefit from the many opportunities presented by the credit transfer. Even though small businesses and freelancers did not use it frequently.
Imagine that you have a partner with whom things finally ended badly and you want to sell him your part of the business for the right price. What happens is that your partner doesn’t want to pay you, claiming that he has many expenses.
One solution is to look for a foreign investor to make you an offer and transfer the credit. Of course, we recommend you put yourself in the hands of a talented lawyer who will handle the situation in the best way and avoid confrontations.