Delaying Application of Payments: How Some Funding Companies Get Higher than Quoted Rate
Steve Capper, CEO, Flexible Funding - July 18, 2017
Companies shopping for payroll funding often ask for a proposal, thinking they will get two or three of them from different companies and compare. Written proposals, letters of intent, letters of interest, term sheets and verbal pitches are not readily apple-to-apples comparable because a payroll funding company can make their proposal look less expensive by leaving out a key cost component– exact and reliable details on the application of payments.
In all accounts receivables financing, invoice factoring or payroll funding arrangements customer payments flow to the funding company, not to the staffing company. The funding company processes the checks, deposits them, and reports the details to you. The remittance amount should reduce your loan balance immediately and stop the fee charges or interest charges… but some funding companies will delay application of payments to make more money.
Flexible Funding occasionally gets calls from the customers of other payroll funding companies. The staffing company will say, “I know the funding company is delaying the deposit of payments because I have communicated with my customer and I know exactly when they sent the payment and/or know when the funding company actually received the payment.” If payment was made electronically by ACH or wire on a certain date, it is instant and the payment should be applied or credited on the same day or the very next day. If a check is overnighted by Fed Ex, UPS, etc. next day, then there is a tracking system that can tell you exactly when the check arrived at the funding company. You would expect the overnighted check to be deposited, applied and credited on the same day or the very next day. The U.S. Post office compiles general statistics and can tell you on average–but not exactly–how many days an envelope, including a mailed check, takes to get from one city to another.
A funding company may not think that you would ever follow these details closely and they may not apply the payment, or reduce your loan, for a few extra days to keep the rate/fee/interest clock ticking. To make more money (more than they quoted you verbally, in a proposal, or even contractually) the funding company may have an unspoken internal policy of delaying application of all incoming payments, delaying application of incoming payments above a certain dollar amount or in a certain dollar range, or delaying application of payments that arrive within a certain time window after the invoice funding date. They might only delay application of payments on checks because the check arrival date is less likely to be discovered or tracked than an incoming bank ACH electric transfer, incoming wire transfer or Fed Ex.
Suppose a payroll funding company charges a fee of 2% two percent of an invoice amount for the first 30 days. As soon as the invoice goes over 30 days unpaid they charge an additional 1%, if the payment for that invoice arrives (AND IS APPLIED) in the 30 day to 45 day window of time. As soon as the invoice goes over 45 days unpaid they charge another 1% of the invoice amount. And, as soon as the invoice goes over 60 days unpaid they charge another 1.5% of the invoice amount, or some other high daily interest rate.
- 2% for the first 30 day period.
- 1% additional for days 30 to 45 day period
- 1% additional for days 45 to 60 day period
- 1.5% for over 60 days.
In the first 30-day period there would be extreme motivation for the payroll funding or payroll factoring company to deposit and quickly apply incoming payments that arrive fast, or earlier in the 30-day window. If an invoice payment arrives on day 15 fifteen after it has been funded, they would get a more profitable flat fee of 2% for 15 days (rather than 2% for 30 days). But if a payment arrived on day 28, or a few days before day 30, then it would make sense for the funding company to delay the deposit/application of the payment until day 30–because as soon as it hits day 30 they get another incremental 1%. This would give them a total of of 3% for 30 days.
Funding or factoring companies typically get the largest incremental increases after day 60 sixty (because receivables are viewed as dangerous credit past day 60) so there would be great motivation to delay application of payments that arrive just a few days before day 60.
If you are with a funding company, or know somebody who is with a particular funding company, you may be able to review a succession of accounts receivable agings and notice if there is a consistent pattern or skew of a lesser number payments, or small dollar payments, in the three or four day window just before an incremental rate increase. And a consistent pattern or skew of a larger number of payments, or larger dollar payments, being applied on or just a few days after the day of an incremental increase…(ie. just on or after day 30, day 45, day 60, etc.). Or there may even be a skew of extra light collections on Friday because holding payment application until both Friday and the weekend are over may get the invoice into the next incremental rate category which could fall on Monday.
Why would a funding company do the above if they knew you would get mad if you found out they were delaying payment applications?
It is extremely likely that you would not even know to ask about these matters. They can sign up a lot of new customers by offering rates that appear to be less than other companies. If you are only one customer out of hundreds, they are not going to change their operations policy because of your one complaint…there is too much money to be made doing it to hundreds of customers,or dozens of customers at a time on a rotating basis.
They don’t/won’t give a guarantee that they won’t do it. There is no contractual or cost penalty to the funding company if you discover that they operate in this manner. Financing agreements are most often one sided in favor of the funding company.
You have absolutely no leverage or recourse against the payroll funding company if they do operate in that way. The only thing you could do is cancel your long-term contract in which case you would be punished by owing the funding company an early termination fee of thousands of
dollars or tens of thousands of dollars. Delay of payment application would not be a reason for legal cost-free escape.
If you were to uncover a regular pattern of delaying application of payments and were unhappy about it, the only real leverage you would have with a staffing agency payroll funding company or factor is being able to leave without penalty. That would require no long-term contract, no early termination fees, no contract minimums, no annual fees or credit line renewal fees. If you did cancel the service– with a company that has a long-term contract and early termination fees– then you would also give up what you have paid in deposits, due diligence fees, sign up fees, and expenses that have been passed onto you (such as legal costs or Uniform Commercial Code filing fees).
There are three other specific areas of payment application that should be noted. The first are partial payments. When some funding companies receive a partial payment or payment that does not pay the entire invoice amount, they will hold the partial payment and not apply it to your account/loan balance until the full remaining amount arrives, no matter how long it takes. (The funding company may do this even though they have already deposited the payment into their own funding company bank account.) Over the course of the year, this may cause significant amounts to run into the next incremental cost category. Partial payments may or may not be addressed in a payroll funding proposal or contract.
A second area where received payments may not be credited to your account or loan is when a payment arrives without an invoice number or a number that does not match up to prior records. Until the matter is alerted, researched and clarified, a funding company may keep the rate clock ticking against you. The handling of payments without invoice numbers, or conflicting invoice number information, is never discussed by sales and marketing; you have to know about them–as addressed here–and you have to ask about them.
The third area of delaying payments is usually addressed in contracts and proposals– a formal but general “days after receipt policy”. It may state how many days after receipt that a payment is applied. For instance, “payments are applied three days after receipt”. A general policy may not include or apply to partial payments or invoice number confusion discussed above. Some companies such as bank-funding organizations will hold for as much as seven days. In all cases, it
must be noted how close to the weekend a payment is received. A two-day hold on a payment received on Thursday may not be applied until after the weekend– which is really a four day hold with respect to the rate/fee/interest clock and charges you must pay.
Flexible Funding’s payroll funding, payroll financing and factoring programs do not include long term obligations, early termination fees, contract minimums, annual or renewal fees, or any passed-on expenses. Flexible also posts ALL payments the day they arrive and applies all of them the very next day after clearing the Federal Reserve bank system at midnight. All partial payments and payments without invoice numbers are also instantly applied.