More Bank Payroll Funding Limitations - FDIC Pressure on Banks
Bank teaser rates for money-only payroll funding programs (without payroll & back office) can be frustrating because so very few can qualify for bank parameters, and too much time passes before an evaluation for funding may actually be completed. Qualification and acceptance is low. The scrutiny that the FDIC is putting on banks to do safe loans is no secret; in the past few years there has been tens of thousands of news articles on the FDIC clamping down in their audits and making safety demands on banks.
A few of the banks that loan money to staffing agencies also loan money to payroll funding companies, and their loans to funding companies are always safely covered for risk multiple times over. There is essentially no risk to the bank when loaning money to a payroll funding company. The loans are covered by:
- Massive owner cash equity in the funding company.
- Outside investor cash in the funding company that will only get paid back to investors after the bank safely collects out first in any danger situation.
- Numerous eligibility and concentration restrictions on the receivables funded.
- Heavy personal guarantees from well-heeled funding company owners.
- Bad Debt safety reserves that are not counted as company equity.
- General funding of only 64% or less of accounts.
The FDIC puts pressure on banks to only do ultra safe loans to payroll funding companies (at essentially no risk.) The FDIC does not then turn around and let the bank themselves do very high risk money-only loans, at truly high advance rates, at a much cheaper cost directly to staffing agencies. "Safety" is the keyword and concentration limits, credit limitations, eligibility and A/R availability restrictions, financial strength, covenants, and negative covenants are the obstacles or counter variables to their pricing. When shopping for payroll funding, you must read between the lines of bank advertisements, bank proposal letters or letters of intent, and business-development salesperson's claims.
In today's tough competitive climate, especially where staffing Managed Service Providers middlemen (MSP) and Staffing Vendor Managers (VMS) are squeezing independently-owned staffing agencies on markups and margins, and asking for high credit amounts, the true effective cash availability must be enough to survive and grow.