True sale
When the law and the contract treat the assignment of invoices as a real sale rather than collateral for a loan.
Why it matters
True sale treatment can determine whether the factor has enforceable ownership rights in a bankruptcy proceeding of the seller. If a court recharacterizes the factoring arrangement as a secured loan rather than a true sale, the factor becomes a secured creditor in the seller bankruptcy estate rather than an owner of the receivables. This distinction affects priority and recovery in insolvency. Most factoring agreements include specific representations designed to support true sale characterization, including the absence of recourse that would make the transaction look economically like a loan.
How it appears in contracts
True sale provisions appear in the recitals and representations sections of the factoring agreement. Common language: the parties intend that the sale of receivables constitutes a true sale and is not a secured financing transaction. Agreements typically disclaim any obligation by the seller to repurchase except for specific contractual breaches, since a repurchase obligation resembling full recourse weighs against true sale treatment. Sellers seeking bankruptcy-remote financing should work with counsel to confirm that the specific terms of their factoring arrangement support true sale characterization under applicable law.
Related terms
Related reading
Sources
- Uniform Commercial Code Article 9 - Uniform Law Commission. Accessed 2026-05-19.
- Secured Finance Network - Secured Finance Network. Accessed 2026-05-19.