True Sale
A true sale is a transfer of receivables or other assets structured so that ownership genuinely passes to the buyer, rather than the transaction being recharacterized as a secured loan. It matters because in a true sale the assets leave the seller's estate, so if the seller goes bankrupt the buyer's receivables are protected. It is the legal foundation of bankruptcy-remote factoring and securitization.
What Makes a Sale a True Sale
When a business sells receivables to a factor, the parties intend ownership to transfer. Whether a court would agree depends on the substance of the deal, not just the label. Courts look at factors like who bears the risk of non-payment, whether the price was fixed and final, whether the seller retained control or a right to repurchase, and how the parties accounted for and described the transaction. The more the buyer truly takes on ownership and risk, the more likely it is a true sale.
True Sale vs Secured Loan
The opposite of a true sale is recharacterization: a court treating a purported sale as a secured loan, where the receivables are merely collateral and still belong to the seller. The distinction is invisible day to day but decisive in bankruptcy. In a true sale the buyer owns the receivables outright; in a recharacterized loan the buyer is just a secured creditor of the now-bankrupt seller, subject to the automatic stay and the claims of other creditors.
Why It Matters
True-sale treatment is what makes factoring and securitization bankruptcy-remote. If the seller fails, a true sale keeps the buyer's receivables out of the bankruptcy estate, so collections continue and the buyer is not stuck litigating priority. This protection is why funders and rating agencies require true-sale opinions in larger facilities and securitizations.
How Factors Structure for It
Factors reinforce true-sale treatment with clear assignment language, non-recourse or limited-recourse terms, market pricing, a UCC filing to perfect their interest, and often a notice of assignment directing debtors to pay them. The same reconciliation and verification discipline that supports invoice factoring also evidences that the buyer is genuinely managing the receivables it bought, which Zolvo helps automate for factoring operations.
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