It’s been awhile (once again) since my last post. Yes, we are all crazily busy… Since my last weblog, I have received several questions across various topics. With that said, I think the best and most efficient manner to answer some of these questions is to respond with a few FAQs.
Q. What happens on a buyout from another factor, do we split the invoices?
A. No. When you buyout another factor or even a lender, you are simply paying off the balance owed to them and taking ownership of all the receivables. This is outlined under a payoff, buyout or other agreement.
Day One Funding: $100,000 at an 80% advance equals $80,000 available to the company
Payoff Amount: $50,000
In the situation above, the factoring company would purchase all the receivables and within a tri-party agreement, payoff agreement or other contract, would then send the Payoff Amount to the former factor and the company would be entitled to the remaining availability. This ensures the former security holder on those accounts receivable has been repaid and has released or assigned their security position to you, the new factor. Other elements to consider include: how future payments from existing account debtors will be processed if mailed to the former factor, how those customers or debtors will know about the change in factoring companies, and other concerns.
Sometimes, however, the availability and the Payoff Amount do not ‘line up’ and literally will not work. For a factor paying off a factor, this actually may not work. However, if the Payoff Amount is to a bank, the factoring company may be able to work with that bank to identify a longer term payment structure. For example, this may result in a ‘pay down’ of sorts followed by payments from future fundings or reserve releases to that bank over a short period of time.
These arrangements should be agreed upon between all parties. It is also a good idea to review any contractual arrangements with third parties with your legal counsel.
Q. Do I need to monitor payroll taxes if I have an 8821 form?
A. Yes. The 8821 Form is just a copy of the company’s current status mailed to you (the factor) along with the client. The person noted as that being copied on such mailings and reports (you, the factor) can be changed at any time without notice. Further, this mailing only tells a factor or a lender of what has already transpired. By then, if the company has not been making their payroll taxes timely, it may be too late.
A factoring company concerned about payroll taxes should also request evidence of the actual payroll taxes being sent to the IRS, or the state, as applicable. This could include a statement if the company uses a payroll service or a copy of the 941 form along with evidence of payment of such taxes. Essentially, whatever format the company pays their payroll taxes in is what you want to receive… along with proof of payment of such taxes.
Q. What is retainage on construction clients? What is mobilization on construction clients?
A. Both are typically not permitted by factors for purchase on schedules submitted for funding. Retainage is the portion of the work performed by a contractor that is held back by their general contractor or owner. These amounts, generally ten percent of the invoice amount, are usually not paid until the project itself has been completed. General contractors and owners tend to hold back a portion (or retain it) of the invoice to be paid to ensure that other subcontractors or other amounts that need to be paid do actually get paid. Further, retainage amounts may take several months to pay.
Mobilization invoices are invoices submitted for work ‘to be’ performed. These are billings a contractor or subcontractor submits for setting up or buying materials for a job. No work has actually been completed at this point. Because of this, mobilization invoices may in fact not be paid.
Q. Do I really need to get monthly accounts payable listings from my client?
A. Yes. Even if the numbers and the vendors listed are always the same, continue to get this report. On occasion, companies will sell to the same person they are buying materials or goods from. If you are unaware of this aspect, the invoice you purchased (as a factor) may be offset by the amounts the company owes to the vendor. Without having this accounts payable listing, you may never know… until it is too late.
For example, imagine a scenario where you never reviewed the accounts payable listing and didn’t realize the company (client) had also been sending checks back to their vendor for purchases the company made. The receivables always paid (on your books — the factor’s books) because of this. However, should the client begin experiencing financial difficulties, the company may tell the vendor to offset the receivables owed because of these amounts owed to the vendor or supplier. And sometimes, if the vendor is having financial challenges, they may choose to discount or not pay their invoices (to the factor) because of amounts owed to them on the receivables the factoring company had purchased.
Wishing you success. The Factor Guru.