Bank Payroll Funding Teaser Rates & Funding Ineligibility
When the rates quoted in a bank payroll funding program or bank line of credit seem superior, one needs to check into the detail of all three layers of funding- availability restrictions that go along with them. In general, the better the pricing, the more restrictions that will be imposed. You don’t get something for nothing.
The first level of payroll funding restrictions are numerous
concentration limits covered in detail in ourFunding Limits – Staffing Customer Account Ineligibility article. The second level of restriction are credit limitations and contract verbiage covered in our Bank-Owned Payroll Funding Program Gotchas – Funding Restrictions article.
When you are presented with what appears to be the most favorable pricing options, a third level of bank regulations and restrictions called “Covenants” will kick in. Covenants can be expectations your business must meet on a continuing basis, in the form of financial calculations that must result in minimum standards. Some of these ratios and financial tests include:
- Tangible net worth on your books at all times of not less than $_____ dollars.
- For instance, they would mandate that you must always have a minimum of $1 million of equity/assets/net worth in your company.
A specified debt to tangible net worth ratio.
For instance, if you had a 1.5:1 ratio, they would limit your maximum credit line by this amount. If you had $1 million of net worth in your company, then you would multiply that by 1.5 = $1.5 million dollars. That is your maximum limit for debt–or your maximum bank loan. The 90% of your accounts receivable financing that they purport to give you is NOT open ended when there is a covenant– you could have $5 million of valid accounts receivables and payroll funding availability would still be limited by a maximum cap of $1.5 million. This test determining your limitations of availability may be done quarterly.
A bad debt loss or loss reserve on your books of not less than $_____ dollars.
This specified amount would be transferred from your listed equity on your balance sheet to a bad debt “reserve account” and no longer be counted as equity in your business. As long as it is no longer counted as equity, it affects the debt to tangible net worth ratio above and limits your borrowing.
For a specified period ending, you shall report a profitability of not less than $_____ . Sometimes this is tested quarterly or even monthly.
A Current Ratio.
An example of a current ratio is “of not less than 1.50:1”. The term Current Ratio means Borrower’s total Current Assets divided by Borrower’s Total Current Liabilities less any short-term indebtedness which has been subordinated to the Lender’s debt. (If there is ever a business meltdown, subordinated monies invested in the business get paid back after the bank gets paid back.) A Current Ratio could be evaluated monthly.
There are also many covenants known as “Negative Covenants”. In a negative covenant, a borrower may agree with the lender that while the agreement is in effect, the borrower shall not make certain business moves without prior consent of the lender. An example of a negative covenant would be a clause prohibiting a transfer of any assets of the business or even any assets of the guarantor of the business loan. These restrictive negative covenants will be covered in greater detail here in the future.
Because of covenants it can be extremely difficult to first qualify for a bank-owned payroll funding (money-only without payroll back office services) program, however, a few staffing agencies will get accepted after months of scrutiny. The real surprise or gotcha often comes later if you do not meet one of the continuously hard-to-meet covenants. In that case they will switch you into a Workout Agreement or Forbearance Agreement where the rate, interest, or fees can be extremely high –effectively even three or four times the original rate.