The Factor Guru

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Factoring FAQs: Accrued Reserves

Mar 8

Posted by Gen Merritt in Operations | Comments off

This question actually came up twice this week. Because of that, I thought I would add to the Factoring FAQs illustrating Accrued Reserves.

The Accrued Reserve is just the portion that the factor didn’t advance to the client; it’s the amount the factoring company is holding back until the invoice pays, in the event their customer (the account debtor) short pays, disputes, discounts, or for whatever reason doesn’t pay the full amount of the invoice.

Accrued (sometimes referred to as Escrowed) Reserves are created when a factoring company purchases an invoice from their client. The invoice amount, less the initial discount fee (typically), less the amount advanced to the client is what then goes into the Accrued Reserve.

Once an invoice pays and the factoring company has received actual cash, this payment then pays back the factor for their advance, pays the factoring fees earned/accrued and creates what is called a cash reserve.

The below calculation and example assumes (i) an 80% advance (or purchase) rate, (ii) a 1.75% discount fee for the first 30 days from when the invoice was purchased by the factor, and (iii) the invoice paying in 30 days or within the initial 30-day period:

Invoice Amount Totals:  $263,500

Advance Rate 80%:  $210,800

Discount Fee 1.75%: $4,611

Wire Charge: $12

Advance less wire fee:  $210,788 (Amount that Client receives)

Ending Accrued Reserve: $48,089

Note the Accrued Reserve is the portion that is not advanced but being held back by the factoring company. When the invoice pays in full (assuming it pays in full), the Accrued Reserve would convert to a Cash Reserve and be returned to the client.  

The Accrued Reserve would decrease if the invoice paid after the 30-days, based on the additional fees charged by the factor, thereby reducing the Cash Reserve back to the client. The above example illustrates the invoices paying within 30 days only.

Wishing you success. The Factor Guru.

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Factoring FAQs

Feb 25

Posted by Gen Merritt in Operations | Comments off

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.

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Complacency: Don’t Assume

Nov 16

Posted by Gen Merritt in Operations | No Comments

The other day, someone sent me samples of backup documentation to review for a new prospect. The client (a transportation carrier) had been with another factor prior and was still being financed by that factor. The good news, however, was that the potential new factoring company wanted to make sure they understood the ‘paper’ they were buying… before they actually bought it. They had questions. They didn’t want to assume. So, they asked.

As it would turn out, the paperwork for the invoices (i.e., invoice, rate confirmation and the bill of lading) indicated other carriers that had hauled the load, or they revealed loads were picked up… but not yet delivered. Strange I thought. However, during the initial verifications on the invoices, the calls with customers of the carrier (or account debtors) evidenced that the loads were real; however, the goods were still en route. What do you know? Would this be an incident of pre-billing?

More than likely… yes. Here’s the question though. What does this mean to the current factor? The only thing I could come up with that happens all the time: complacency. You know what I mean. That thing that happens over time when you become comfortable with a client relationship, you stop looking at all their paperwork, you don’t call as often on their invoices as you used to, etc. Complacency does happen.

Now is the time to look at those clients’ performance, and more importantly, to review the account management on those accounts — to review the processes and procedures in your portfolio. Typically, factors feel they know the ‘weaknesses’ in their portfolio already. They ‘watch’ those accounts ongoing. Yet, it is the client you know and love that sometimes has issues… causing financial challenges… and potential exposure and risk to the factor.

The current economic climate dictates vigilance. It requires relentless review of your portfolio. It doesn’t stop there: looking more at the invoices and backup documentation being reviewed, how the collection calls are going and how checks are coming into the lockbox can be critical. In this new financial environment, a good check and balance system should be in place, even an internal audit each quarter or a few times each year. Otherwise, how will you feel comfortable that your processes and procedures in place are being adhered to sufficiently?

How will you know complacency is not occurring? Several firms perform these services including Factor Source, Factor Help, and several other examination and auditing firms. Or, call the International Factoring Association for consultation and assistance. You can even have someone internally review these processes. This is not a sales opportunity but a mantra for looking at your portfolio… over and over and over again. I believe it was Keith Reid who said, “If you think fraud isn’t in your portfolio, then you just haven’t looked hard enough.”

Yes, these internal exercises may appear to be in vain and actually may result in nothing being found. (What a relief). And, yet, if you identify a potential concern before it transcends into a true problem… then, it is worth it, right?

Vigilance is the test for a factor. Yes, trust, by verify; however, maintain vigilance. Reduce complacency. Focus on not just sending money out the door but also getting the money back.

Wishing you success. The Factor Guru.

 

 

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Transportation Factoring: Feedback Wanted

Oct 28

Posted by Gen Merritt in General Information, Operations | Comments off

I have been contemplating (…or have already started…) writing a guidebook for transportation factoring. This continues to be more of a ‘niche’ industry when it comes to transportation factoring. In this venture, I am seeking feedback. In the post below, I have listed some questions and summarized feedback to those questions we have received that would be included in that manual/guideline. Any interests, feedback, suggestions would be helpful. Thank you in advance for your input and continued interests in this weblog:

Can a carrier operate outside of their base state after they have applied for authority? If a carrier is transporting exempt commodities and has a USDOT number, they may operate as an exempt for-hire interstate motor carrier without an MC number… Simply applying for operating authority is not sufficient.

Can a contract carrier broker loads? No. A contract carrier cannot broker loads without…

What is Intrastate Authority? Intrastate authority is the right granted by a state to commence for hire trucking operations within the borders of that state only. If a load’s origin and destination are within the same state then intrastate authority may be required…

What if the carrier is operating without their authority? Operating without authority can lead to civil penalties… invoices generated by carriers who are operating without their authority may be considered invalid and would not be subject to payment by an account debtor…

Is double brokering legal?  Yes but…

After reading everything about double brokering, I am still confused on what this is? Double brokering is where one broker brokers a load to a trucking company with contract authority. Then, that entity in turn brokers the load to another contract carrier, without the knowledge of the first broker…

Feel free to comment or email me directly at support@factorguru.com.

Wishing you success. The Factor Guru.

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It’s All About the Billing… No Surprises

Oct 23

Posted by Gen Merritt in Operations, Sales and Marketing | No Comments

It seems like an easy question when you are meeting with prospective clients, “What do you do?”  They tell you and walk you through on a ‘high level’ how their business works.  They explain some of their history, how they got involved in the business, where their business is headed, what their customers are like, and sometimes much more than you ever thought of asking.  Within this information are some basics that we sometimes can gloss over, especially since they seem so fundamental: they receive an order, sell a good or perform a service, and they complete it.  What more is there to know? 

Sometimes, more than you thought possible… 

The #1 reason for delay of an initial new client funding can be attributed to not being able to structure a funding solution because the information is received late in the game. This information can include client names not being accurate in various places, including on the invoice, payment requirements being maintained including insurance needs and licenses, and more typically, the customer/debtor terms of the order directly affecting the payment of each invoice.

For invoices of any significant size, a contract, purchase order or other documentation outlining the company’s responsibilities between your prospective client and their customer is almost sure to exist.  Orders generally reflect the agreed upon price, the payment terms, what triggers billing, any insurance requirements, potential offsets or assignability, and more… Because of this, the next time you receive a complete application package and have any doubts about fully understanding the prospect’s business and billing (and I mean ‘any’ doubts), consider phoning the company again for a more in depth discussion prior to processing their application. 

Even if you are in the process of waiting for a prospect to respond with a completed application, what better reason to make that follow-up call and engage them than having them talk to you more about their business and how they operate that business. Understanding what they do can only help you, a factor, and the client, as they will not have to deal with ‘surprises’ later. Have them describe their billing processes and their customers’ payment history.  The company may even become more comfortable with you because you are taking an active interest into their business and truly how it works – you’re taking that extra step to build the relationship – you are showing them you want to understand their business and their needs.

It is always better to understand this dynamic prior to sending documents… prior to leading a company on (as they say). Why waste your time… or theirs. No surprises. That should be the motto, right?

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More on Payroll Taxes

Oct 19

Posted by Gen Merritt in Accounting, IRS Information, Operations | No Comments

Getting back to a prior question… “Why are payroll taxes important?”

Delinquent taxes and IRS liens can be very disruptive to businesses and to lenders/finance companies. If companies are unsure how to calculate these taxes or what effect delinquent taxes may have on a business, visit the IRS Payroll Taxes Educational Module  and other information available from the IRS at www.irs.gov. Sometimes, when working capital becomes tight, the last bill to be paid is usually the payroll tax bill due the IRS.

Once delinquent and should such taxes remain unpaid and continue being past due, penalties are assessed. Eventually, a Federal Tax Lien (FTL) would be placed on the business. Many times, the lien filing date is for a period from up to two or three years ago.  The tax period will be reflected on the lien filing.  Any tax periods since that date would need to be evaluated to see how far behind a company truly has become on their taxes. 

When a Federal Tax Lien (FTL) is filed, it is a negative item on the credit bureau report of the company.  It may also result in creditors calling in their notes as they become aware of the FTL.  The FTL generally becomes the most senior claim against the company’s (or debtor when referring to UCC and liens) assets with the exception of first mortgage holders who have properly filed financing documents. The FTL may also displace the primary security position of factoring firms lending on accounts receivable and bank revolving lines of credit 45 days after filing (each situation is unique and must be considered on individual circumstances). Certain claims may trump an FTL such as legitimate mechanic’s liens, local taxes, and perfected landlord liens.

In some jurisdictions, local law provides for separate filing of liens for real property and personal property. In that case, the IRS may file two identical liens, one under personal property records and one under real property records. It is important to note that the IRS does not necessarily have to file under the exact legal name of the corporation and may file under a ‘variety’ of the name.

The FTL is the basis for IRS legal authority to foreclose on debtor assets by conducting a seizure. Since the IRS Reform Act of 1998, seizures by IRS Revenue Officers have dropped dramatically. The lien is not to be confused with an IRS levy. The IRS can levy on a debtor taxpayer’s bank accounts or wages without a FTL. The IRS only needs a valid assessment and must have served legal notice in the form of a certified mail letter to the company’s last known address 30 days prior to levy. However, often the IRS has filed an FTL before levy action even though it is not required.

When a FTL occurs, the lien must be resolved.  This is not just for the business owner themselves, as the IRS will eventually seek collection from the customers of the business as mentioned previously, but also for any secured lender/commercial finance company.  Again in the case of the factoring company, the IRS will ‘prime’ the liens in place.  The factor will have 45 days from the earlier of their discovering the lien or from the date of the filing to essentially collect out of the funds exposed on the assets purchased.  Any monies sent to the company after those dates are subject to the IRS lien filing. 

This does not affect monies already sent to a company (i.e., a term loan based on equipment or real estate whereby the funds were paid up front and the payments are amortized over a set period of time).  However, in the case of a line of credit or factoring where new funds are being paid out while collections are being paid, that lien position would be critical.

This can become a concern for factors and lenders. Resolution alternatives are available. We will address those in a future posting. Until then, monitoring these taxes on an ongoing basis can be critical to a factoring company.

So, until the next time, happy reading…

The Factor Guru

 

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Payment Application: Does it matter?

Sep 27

Posted by Gen Merritt in Collections, General Information, Operations | No Comments

Well, I am still new to this blogging concept… this week we did have some other topics on risk prevention, not just risk management. In some cases, this may not be the new deals you are looking at, but rather, those already on your books. The common theme among some of the questions: payment application on invoices. And, you ask, why does this even matter?

When invoices are funded from a schedule that has been submitted, several implications may be made. First, the factor is maintaining their books, the receivables, to monitor those invoices. Second, the company selling the invoices may rely on the factor (depending if the factor offers these services and if the company selling the invoices desires these services) to enter the invoices, call and collect on the invoices, and track payments accordingly. Overall, payment application should be a simple concept: When a payment comes in on an invoice that has been factored, the payment should be applied to that invoice.

Sometimes, however, companies will call and request that a factor use payments that come into a lockbox to close out other, older invoices in an effort to reduce accruing fees or for other reasons, even when such payment request would mean applying collections from one customer to another customer’s invoice(s), applying collections for one invoice to other invoices, etc. In other cases, no check remittance may be available and instructions for how to apply such funds are directed by the company (not the customer writing the check). And, although rare, potential frauds can grow over time should misapplied payment practices be in effect.

Logically, reducing fees makes sense if that is the reasoning behind such request. The majority of the time, however, other underlying factors exist. Applying payments to the wrong invoices can cause confusion among the parties involved, may result in invoices appearing to have been paid that in fact have not, or may show skewed account debtor payment history on the factor’s reporting system. More importantly, it may make it harder to reconcile both the company’s and the factor’s records at a later date, should the need arise.

By applying payments to proper invoices, or showing them as non-factored funds if they are truly non-factored, the paper and payment trail can be maintained. Should a company want to use those funds to reduce fees, they may be able to just use the available ‘cash’ reserves to close out invoices. This maintains the integrity of the payment history for all parties involved, including the account debtor (the company’s customer). This process also allows for collection calls to be placed on aging invoices that may still be open with the company.

So, how do you know if this is a problem? Just do a simple audit. Pull a few months of collections or even a sample of a few customers/debtors (meaning, actual check images/copies) and compare these checks to how those payments were actually applied. Do they match? Were they applied to the right account debtor and the correct invoice(s)?

Now, what do you do if this type of payment practice has already started on a client account? Sometimes, the best rule may just be to correct the problem going forward. And, sometimes, once caught, you may be able to identify a potential risk that may not have been known. You may be able to prevent misapplied payments that had been a cover for fraudulent activities on behalf of a company selling invoices to a factor.  Again, this would be an exception. However, good processes and practices cannot only help a factoring company but also the company selling the invoices. 

Wishing you success… the Factor Guru.

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