Bank-Owned Payroll Funding Program Gotchas – Funding Restrictions
There is one major gotcha with many bank operated money-only (without back office payroll services) payroll funding programs; after staffing agencies sign up they may eventually find the EFFECTIVE ADVANCE RATES or EFFECTIVE CREDIT AVAILABILITY to be inadequate. Too many staffing agencies sign up for the good pricing and then find themselves squeezed by eligibility restrictions. Specific examples of hidden credit limitations or ones that you may not be aware of include the following:
- A contract that refers to purchases which are subject to “purchase limits” and verification. The term “purchase limits” is unspecific and unclear, and an easy way to take back availability at any moment. The offer of a huge credit line may be useless with purchase limits.
- Contract wording that says they fund “up to” 90%. “Up to” is not clear on eligibility. In the fine print of the final contract (not the funding proposal, letter of interest, letter of intent, etc.) it will often end up being “the lesser of” 90% OR some other “eligible” accounts receivables.
- The fine print of many bank programs can exclude groups of receivables such as those from Managed Service Providers/Vendor Managers, certain government accounts, European, Canadian, or Japanese companies or their divisions, etc.
- If a Dun & Bradstreet or Experian credit report on your customer or prospect says that the highest credit amount extended to the customer by suppliers is $60,000, a conservative bank credit department may not let you go over $60,000 and never make an exception to the rule. On the other hand, a privately-owned payroll funding company might figure that if they are good for $60,000, they are probably good for $70,000 and will not cut off your availability for that account.
Banks may have two or three different divisions, entities, or programs that purport to do be doing some form of staffing payroll funding, factoring, asset-based lending, working capital, accounts receivables financing, etc.. When you are talking with a bank sales development VP, you should be clear on exactly which payroll financing division or program they are pitching. No matter how good the pricing may seem at some of these divisions, or in these programs, one thing is a true constant –banks are tightly controlled and regularly audited by the FDIC. With the total meltdown of many banks in the past few years, and the fragility of so many of the remaining ones, continuing brutally-tough FDIC audits are the new norm for the strongest banks as well as the weakest. No bank, no matter how strong, is spared. The scrutiny on banks is fierce and their payroll funding loans must be safe and conservative, especially in a money-only (without payroll processing back office) funding program.