Accounts Receivable Funding Customer Notification and Invoice Verifications Part 1 of 2
Steve Capper, Principal/CEO, Flexible Funding - July 17, 2017
Payroll funding or factoring of invoices and accounts receivables is risky business. In most cases the funding company will want to make sure, especially at the beginning of the funding relationship, that the staffing agency’s customers are aware that there is a payroll funding company in the picture. And the funding company will usually want to verify directly with the staffing agency (or other business) customers that the invoices are real, actually received by the customer for
labor that has been performed, and not subject to any kind of discounts or offset. Verification is a process to check the validity of the receivables and to make sure that they will eventually be collected. In another type of payroll funding called “non notification” funding, the payroll funding company remains invisible to the staffing agency’s customers in the normal course of business.
Payroll funding contracts, service agreements, written sales proposals or letters of intent, and verbal sales pitches say very little or next-to-nothing about the notification and verification process. They only say that verifications and/or notification will be done. Commonly there are no details about how they will be done, when they will be done, exactly who they will be done with, and why the format/process may change as time goes on. This is all at the funding company’s discretion, typically without any limits. The funding company does not have any obligation to justify any individual action with any explanation…other than “we need to notify/verify”. If you are unhappy with the process, there is no third party arbitration, mediator, or referee on the matter.
The notification/verification process often moves along in a very routine manner and nobody complains, however, if the process is too disruptive for your business, be aware that nearly all payroll funding companies will not let you out of their long-term contracts just for this reason alone. You will have to live with the problem for the term of the contract–typically one to two years–or pay a hefty early termination fee to get out of the contract. That notifications or verifications turn out to be annoying or intolerable to you or your customers is generally not a reason for which an attorney can break a long-term funding contract. Know what you are getting into before you sign up.
If a staffing agency were to feel there were problems with notification/verification, they would be more inclined to believe so at the beginning of the payroll funding or factoring relationship. Prior to receivables funding, the staffing agency may have been self funded, had investor funding, or bank funding where notification/verification was not done. The staffing agency and it’s customers may not be familiar with the notification/verification process and the new element might be a bit of a shock. The second scenario where notification/verification may be seen as annoying is when a staffing company is with a payroll funding company that does not normally do notifications/verifications, and then the staffing company switches to another funding company that does perform notification/verification. Frustration develops if a staffing company starts thinking about escape, and upon re-examination, finds the contract early termination fees to be quite costly,…and/or substantially higher in the earlier months of a long-term contract.
If funding company notification/verification activities intensify later in the life of the long-term contract, it is usually because of some financial weakness in the staffing agency or a real problem with the customer account debtors and/or their credit. (The rule for funding companies is; the greater the risk the greater the verification.) In such cases, the staffing agency owners/management are likely already aware of the situations, and understand the justification for the stepped-up activities. In the case of a serious credit rating decline of the staffing agency’s customer, the staffing agency may even like that the funding company is stepping in to stand behind them (the staffing company) in getting paid.
Notification letters to customer account debtors to inform them that there is a funding company in the picture are sent to the customers and are signed by the funding company (and in some cases may also need to be signed by the staffing company.) They are often on the funding company’s letterhead, not on the staffing agency’s letterhead …although in some cases a funding company may allow the letter to be sent on the staffing agency’s letterhead. If you are uneasy about any of the wording in a notification letter, know that funding companies will usually not deviate from the language. It is a legal letter that is straightforward with the debtors and it may not be dumbed down or made pretty and sweet even though a business owner may request that it be.
Basically what a notification letter communicates is that the funding company is funding the accounts receivables and has a Uniform Commercial Code UCC document on file at the Secretary of State referencing the funding company’s interest in the accounts receivables, and any other collateral they may have contractually. It will mention that payments should go to a lockbox address or funding company bank routing number. A key component of notification letters is the mention that if a customer does not send payments to the correct lockbox address or bank routing, then their payment elsewhere will not reduce their debt or obligation to pay. For example, if the staffing agency’s customer account debtor has been delivered proper notification, and then the customer sends the payment directly to the staffing agency instead, the payment doesn’t count. The agency might put it into their bank account or cash the check, and then the agency’s customer will have to pay the same invoice again to the funding company….they will be liable for double payment. Case law on these matters is extremely solid in favor of the funding companies. The specific case law is often cited in notification letters to the customer (and customers would not be able to ignore the notice, claim ignorance, or have an attorney counter a properly-served letter). In this scenario the staffing agency may additionally take a bruising because many funding contracts allow the funding company to penalize the staffing company ten to fifteen percent of the invoice amount for funds that are intercepted.
Funding company contracts provide for notification to the customer account debtors at the funding company’s discretion, however, most funding companies–as a courtesy–will let you know when it is going to be sent. An extremely few funding companies actually have it in their contract that they must give you a warning shot before notification. The notification letters to the customer account debtors usually start out with a sentence that your company has been provided with a line of credit for growth and therefore the receivables are being assigned, purchased or sold.
With an early prior-to-notification warning (from the funding company to you) you would get a chance to be proactive with your customers, by calling them on the phone to tell them the notification will be coming and that the funding company could even periodically re-notify. You could sell to the customer that you have a new line of credit to provide for your large/positive growth and/or that other companies cannot get access to capital. If hand holding is needed, or if it makes the staffing agency or accounts payable people feel better, a funding company will do a conference call with you.
Discussion of forthcoming notification can be useful if the customer payment checks must now be written out in the name of the funding company rather than in the name of the staffing company. There may be need for changes in vendor agreements or vendor numbers. Some staffing contracts have special clauses/provisions for any kind of legal notices such as where notices must be sent to. Sending a notice to a mom & pop operation is easy if there is one location. Dealing with a very large company, a big bureaucracy or a multi-state national company may not be so easy.
- A vendor number may need to be included on any and all notices.
- Sending a notice to a Delaware headquarters may not work (according to the contract).
- Possibly a field office has to first sign off on all notifications, and then you get a list of people authorized to sign off in the home office.
- You might mail invoices to Texas, and the invoice gets paid out of Pennsylvania, but neither of those two places are proper for notifications.
A funding company may call your customer(s) to inform them of the processes beforehand, and to follow up with the customer account debtors on any notifications that have already been sent out to them to be sure that they were done correctly. In a few extremely rare cases, some customer account debtors have refused to cooperate with funding companies…and threatened to terminate the staffing agency for another staffing company before accommodating the finance relationship. This may be able to be rectified by a call from an attorney with specific knowledge of commercial lending law.