Accounts Receivable Funding Notification and Invoice Verifications Explained Part 2 of 2
Steve Capper,Principal/CEO, Flexible Funding - July 17, 2017
Funding Invoice Verifications
There is a wide spectrum when it comes to the who, what, where, when, why and how of pre-funding invoice verifications. Your funding company may be willing to tell you all, may only tell you what’s going on when you complain, or they may want to tell you as little as possible feeling that it keeps them in control and keeps you off guard.
Frequency of Verifications
Non notification funding. With non-notification funding or ABL asset based lending (rather than factoring) during the normal course of business the funding company does not verify invoices with the customer account debtors in the normal course of business.. Although they do not verify, the funding company reserves the right to verify at any frequency, and may notify if at their discretion something is going on outside the course of normal business. The funding company will not list out what is outside the course of normal business. It could be anything including but not limited to:
- A company tax liability or a personal tax liability
- Skipped payment of earlier invoices but payment of later invoices
- A credit warning from a credit bureau about one of your accounts
- A newspaper article about the financial health of a company
- One credit, discount, chargeback or offset on just one invoice from one account
- An unreturned voice mail(s) requesting a callback
- Sudden increase or sudden decrease in sales volume from one account
- Any delay in providing the company monthly, quarterly or annual financials to the funding company
- Upon review, a recently noticed clause in the staffing agency’s contract or vendor agreement with their customer
- A new DBA-doing business fictitious name
- Disagreements between business partners or the exit of a business partner
- A bankruptcy of any of your customer accounts or any of their parent companies or divisions
Verification/Notification Funding Frequency
With true factoring or notification/verification funding, the possibilities for invoice verification frequency are:
- Verification of invoices at the very start of the funding relationship and on a continuous weekly basis.
- Verification of invoices only at the very start of the funding relationship (but not on a continuous weekly basis thereafter.)
- Verification of invoices at the very start of the funding relationship and then random spot verifications into the future
- No verifications at the start of the funding relationship but random spot verification into the future for no reason in particular
- No verifications at the start of the funding relationship but verifications into the future for very specific reasons (at varying frequencies, for outside-the-normal-course-of-business reasons)
In the greater overall grand view, know that, at it’s worst, there could ultimately be many contacts with your customers not just for the verifications, but everything related to verifications. A call could be made to explain the forthcoming notification letter introducing the staffing agency’s new funding relationship to the staffing agency’s customer. A second call could be made to follow up on the notification letter after it has been received. A third call could be made to explain the invoice verification procedures to your client. A fourth call could be made to verify a specific invoice. A fifth call could be made to find out when payment is expected on the earlier invoice that was verified, and to make sure that there are no chargebacks, offsets or credits. And then a sixth call could be made by an auditor of the funding company’s own bank (providing the funding company with large credit lines) directly to the staffing agency’s customer to also verify invoices.
Methods of Verification
Invoice verifications may be done verbally on the phone, written, or electronically. Some companies use a mixture of methods. Written is the preferred method for many companies because there is solid evidence that shows that it got there. Via overnight, certified mail and fax are still used in the age of e mail. The verification may reiterate that the funding company is providing working capital, and the invoices are typically listed with invoice dates, invoice numbers and amounts. The funding company will ask that the customer sign a verification form and send it back, however it is important that the person signing it truly understands the process and has the proper authority to sign. The payroll funding company will likely be the one to make the determination of who the right person is. For example, an accounting manager, a/p person, corporate treasurer or controller may be the proper person to verify the invoice. A junior accountant or intern should not sign it.
At some very large companies, they will not sign the verification letters and send back or verbally verify, but they may arrange to let the funding company check the information in an online/web system with a login and/or password. It is up to the funding company if that is sufficient. In one case, the funding company logged in so frequently that the staffing agency and the payroll funding company were kicked out of the system, causing a lot of frustration for everyone….so be aware of the limits or guidelines beforehand.
If the funding company is doing verbal verifications, they might use a digital telephone recording system, with verbal verifications stored by debtor date and client.
What kind of things might a payroll funding company ask your customer when doing verifications? Besides just asking questions, what might a payroll funding company observe while doing the verifications? And what kind of problems can turn up while trying to do the verifications, which might result in even more calls to your customers?
Anytime there is a new customer debtor, new information will have to be input into the payroll funding company’s internal software for future verifications. The customer debtor will usually be contacted for the input data including such information as:
- Payables contact- email, phone, fax and address
- Alternative contacts for when payables contact cannot be reached
- How debtor prefers to be contacted
- Whether payments are processed from another location
- Client vendor number
- Standard payment terms in number of days (ie. Net 30 days)
- Other Standard payment terms (ie. per contract, per invoice, pay on pay provisions, per vendor agreement)
- Total amount debtor shows outstanding
- Total amount debtor shows as already paid
- Any pending credits, deductions, or offsets
- Whether debtor has acknowledged the Notice of Assignment
- Support documents required by the debtor such as purchase orders, signed time sheets, rate confirmations, work orders or change orders, contracts
The staffing agency– in the interest of having their customer bothered as little as possible– may attempt to to provide most of this information to the funding company. Although putting the information on a silver platter for the funding company may help in some cases, most funding companies want to independently determine/research all of the data on their own. Even if you do provide solid information to the funding company, they will still often attempt to verify the information directly and/or indirectly. After the initial setup, ongoing or future verifications may have the funding company asking the customer(s) for more information:
- That each individual invoice is for the correct amount
- Whether each individual invoice has the agreed on terms
- That each individual invoice has the proper name that matches the support documents
- Confirmation that each individual invoice has the proper remit to address
- Whether there are any offsets, disputes or credits
- What is the amount of total outstanding accounts receivables owing at a given time (not just for information on specific invoices).
Verification does not always go exactly as planned, however, every single invoice may not need to be verified; only a required minimum percentage (ie. 70%) of invoices may need to be successfully verified at an account, or for all factored accounts in aggregate, for a release of funds by the funding company. The minimum percentage of successful verifications required for a release of funds may change depending on variables such as whether the customer account represents a high concentration of your total accounts receivables, whether there is credit insurance on the account, recent payment patterns by the customer, prior experiences with the debtor, reserves on hold, etc..
If the services performed or product provided is complicated and precise, there may be more room for dispute and therefore there may be more verifications.
When the funding company calls the customer, notes may be made as to whether the debtor is difficult to reach and about the payables contact demeanor. Were they friendly, busy, annoyed, rude, difficult, or not knowledgeable? Even that could have some bearing on the funding company’s decision to release funds. Additional notes may be logged on just about anything: key personnel changes at the debtor client, instances of clients picking up checks, invoice receipt delays, an increase in billing errors, payment pattern changes, or even a change of an e mail address extension.
Although it is not a common situation, you may wish to know upfront if your funding company or prospective funding company outsources some or all of the duties of debtor notification and invoice verification. There are outside independent companies that provide funding companies with debtor credit investigations, debtor notification/re-notifications and acknowledgements, purchase order and contract remittance review, and third party independent verification and monitoring services. They may do it either pre or post funding, or both. When a contract review (of the contract between you and your customer) is performed, someone will be looking to see that the name on the contract exactly matches the debtor name on record or invoices. They will make sure that all pages are received, that it has been signed by both parties, whether there are any special insurance requirements, that there are no rights to offset, and that there are no clauses prohibiting assignment, transfer, purchase or sale of the invoices. The payment terms and conditions will always be scrutinized.
Simple verification can take many turns. Some verification problems are honest mistakes or the result of corporate/bureaucratic limitations. Others may be red flags that something is amiss. A few examples include:
- The funding company contacts the debtor’s accounts payable department to verify specific invoices and the debtor will only verify the balance of invoices owed in bulk or the checks to be written, but not any details for that open balance (ie. actual invoice numbers).
- Supervisor will not sign off on work completed.
- Invoices are always being misplaced, with requests that they be sent again.
- A supporting document is duplicated and used with an earlier invoice.
- The debtor can only be contacted by cell phone.
- The customer account debtor refuses to speak to the funding company.
- Debtor confirms they have the invoice but informs that they are pre-billed (before work is actually complete).
- The funding company learns that the debtor just got off the phone with the client, and the debtor was told to verify what the funding company is calling about.
- The debtor knows who the client is but confirms they haven’t done business with that company for months.
- Verifications are going too easily. For instance, a huge company like General Electric is too eager to help the verification caller, and GE seems to instantly know everything about the invoice.
- Discovery that work was only partially completed with additional work needing to be done.
- Work was completed for the customer but the workers did not get their payroll checks.
- An invoice is received but is not able to be matched with a purchase order.