Cession Agreements in South Africa: Understanding the Basics
When it comes to business agreements, cession agreements are becoming increasingly popular in South Africa. Cession agreements have become an important aspect of many business transactions, and it is essential to understand their basics.
What is a Cession Agreement?
A cession agreement is a contract in which a creditor, called the cedent, assigns their right to receive payment or performance from a debtor to a third party, called the cessionary. Essentially, in a cession agreement, the cedent transfers their rights to another party.
The debtor is not required to provide any additional payments or performance to the cessionary. Instead, the debtor continues to fulfil their obligations to the cedent, who is now obliged to pay the debt to the cessionary. Essentially, the cessionary steps into the shoes of the cedent, and the debtor owes the cessionary as they owed the cedent.
What Makes Cession Agreements So Popular in South Africa?
Cession agreements have become popular in South Africa because they provide an easy way for businesses to finance their operations. By using cession agreements, companies can access financing without having to pledge assets as collateral. Instead, the cessionary is relying on the future payments of the debtor to pay back the loan.
Cession agreements are also popular because they are easy to set up. As long as the cedent and cessionary have a written agreement and the debtor agrees to the cession, the agreement can be finalized.
In addition, cession agreements are flexible. They can be structured to allow for partial cessions, which means that only a portion of the right to collect payment or performance is transferred. This is advantageous because it allows the cedent to retain some control over the transaction.
What Are the Risks Involved in Cession Agreements?
Cession agreements come with some risks. The main risk is that the debtor may default on their obligations, which could leave the cessionary with no means of repayment. In addition, the cessionary is not protected from any claims made against the debt by other creditors.
It is important for both the cedent and the cessionary to understand the risks involved in cession agreements and to take steps to mitigate them. This may include conducting a credit check on the debtor or requiring collateral.
Cession agreements are becoming an increasingly popular way for businesses in South Africa to access financing. They provide an easy way to access capital without having to pledge assets as collateral. However, these agreements come with some risks, and it is essential to have a clear understanding of the terms and conditions before entering into one. With proper consideration, cession agreements can be an effective financing tool for any business.