Exit by New Business Entity

An all-too-common funding exit strategy for staffing agencies, and one that causes many problems, is the formation of a new business entity. The idea may be to start a new corporation and quickly or gradually move the existing business of the old company to the new company not covered by the funding company contract. What happens next is usually an onslaught of legal letters and threatening calls from the funding or factoring company.

You may spend thousands of dollars in legal fees responding to the letters. It is possible that the funding company may want to be paid early termination fees. They could claim a fraudulent transfer of the collateral, or that the new business is an alter ego of the old company. There can be a demand for immediate cease and desist, or they may start court proceedings. They may contact and/or write letters to the staffing agency’s customers, creating great confusion. And when they get hold of checks from the customers they may deposit them in their account, and keep them, or make you fight to get them back.

All funding companies have seen the above tactics, and most factoring or funding companies have seen both sides of it (by funding the old company or the newer company). In some cases, you can’t blame a funding company for trying to protect their interests. In other cases payroll funding or factoring companies are unreasonable and go overboard in their reactions.

It doesn’t always matter that the transfer of the accounts from the old business to the new business is documented by sale papers and good or real consideration. Or that the transfer was to a third party friend, employee, or a relative. It is pretty sure that the payroll funding company will be on the lookout for such transfers and will find out about it. After that, anything can happen.