Payroll Funding of Government Invoices Accounts Receivables
Steve Capper, Principal/CEO, Flexible Funding - July 19, 2017
Doing business with the government under Federal contracts, with the need to finance those invoices, can add many dimensions to relationships and procedures with the government customer- as well as your payroll funding company.
Before funding any Federal government receivables, the funding
company may require that you comply with the ‘Federal Assignment of Claims Act’ discussed below. Always inspect the funding contract to see if there is any specific mention of government receivables or the Federal Assignment of Claims Act. Some funding companies or banks will not accept receivables from the Federal government at all, as mentioned in their basic contract. Others will cover the matter in an amendment rather than in the main contract agreement. Also, a funding company may require an amendment (or exhibit page) for government receivables only when the need for funding them comes up down the road, rather than at the beginning of the funding relationship.
Is there a dollar limit that can be financed on government receivables or a limit on the amount of government receivables allowed as a percentage of your entire customer portfolio? A payroll factor or payroll funding company may be willing to fund some level of government receivables without complying with the Federal Assignment of Claims Act. But at a certain point when dollar volume climbs and the government concentration percentage climbs or some other business risk factor enters the picture, there may be new requirements for cooperation (from you and your government customer) to help the funding company comply with the Act.
Uniform Commercial Code ‘UCC” and Invoice Assignment Basics for the Layman
For the layman to understand the Federal Assignment of Claims, one must start with a little bit of prior knowledge about the Uniform Commercial Code or ‘UCC’. In commercial lending, the ‘UCC’ is a body of acts/laws/codes/procedures across the nation which allows a funding company to be able to create and ‘perfect’ a legal interest in the assets, property, or rights of another company, person.
When you enter into a financing contract, a payroll funding company or commercial- lending factoring company will file a UCC document at the Secretary of State that creates a public record informing the world that they have latched on to the accounts receivables/invoices as security for their financing The funding company may also take additional collateral security other than accounts receivables if you allow it.
Once they have a UCC Financing Statement filed, it provides the funding company rights to collect on specified assets according to the terms of the contract. It also gives the funding company priority (to collect on the security) over other parties such as other secured lenders, judgment creditors, trustees in bankruptcy, and other parties. If the funding company files a UCC Financing Statement document before other parties in a line of time, they will generally have priority interest in the named collateral. (Under certain circumstances a funding company may actually lose it’s priority over other parties even if they filed a UCC document prior in time. Or, various parties sometimes formally agree to switch their position in priority.)
In most funding company agreements, account debtors/customers of the staffing company (or other business) are instructed to send payments for invoices directly to the funding company.
Once a funding company has the ‘UCC’ in place for funding accounts receivables, they can send a legal notice to the customer account debtor informing them of the funding company’s rights to the security collateral. This notice is often referred to as a ‘NOTICE OF ASSIGNMENT’. The notice explains that payments must be sent to the funding company, and that if payments are sent anywhere else then it will not count– it will not discharge the customer account debtor’s obligation to pay. If they pay anybody else after receiving the notice, the customer still has to pay the funding company. In effect, they would be legally liable for double payment.
Federal Assignment of your Accounts Receivables
When the Federal Government is in the picture as a staffing company customer the details of assignment and notices of assignment gets more complex because everybody must comply with the formalities of the Federal Assignment of Claims Act. The Act specifies details, documentation, formats, procedures and methods for getting the Federal government to formally acknowledge that a funding company is in the picture. There are many details provided on how to properly file and follow up on Notices of Assignment–formal notices that the funding company is in the picture. There are dozens of pages in the act on how invoices are to be submitted and processed. The Federal Assignment of Claims Act provides a funding or factoring company methods and procedures for more direct access to information, online systems, and more direct access to government personnel regarding the contracts and payments.
Although many accept the Federal Assignment of Claims Act as an way of life, others consider it tedious and intrusive. For a funding company, it can provide a higher level of assurance that the Government department you are contracting with pays directly to the funding or factoring company for invoices that have been financed. It provides a better chance for the funding company to successfully sue the government for payment if the government ever sends payments elsewhere–other than to the funding company.
If both you and the funding company did not comply with the Federal Assignment of Claims Act, and the government sent payments for funded invoices to you, and then you did not return those payments to the funding company as required, the payroll funding company can still penalize and successfully sue you. However, because the Act was not complied with, the funding company would have a rougher time suing the government to get it to pay again. (If the Act had been complied with, and then the government sent money it owed to the staffing company rather than the funding company, the government might have to ‘pay again’ because funds sent to the wrong place do not discharge the government’s debt obligation.)
When Funding Companies Need Compliance with the Act
Whenever any funding company requires compliance with the Federal Assignment of Claims Act, the assignment must be for the entire contract that you have with the government. In other words, the assignment must be for all monies due under the contract. Assignment cannot be just for certain invoices, or one invoice due under a broader contract. The government must have only ONE PAYEE. You may not need to finance or fund every invoice under that contract, but ALL payments under that contract will flow to the funding company. (Funding companies do have discretion as to what task order or invoices are funded, and some funding companies actually do require that you fund every invoice.)
There are lenders that want compliance with the Federal Assignment of Claims Act on ALL of your Federal government accounts receivables, or your funded government receivables, at all times. Some lenders only require it only when there are large dollar amounts involved or if the Federal government is a concentration customer of yours.
Other funding companies do not require compliance with the Act at all. There are a number of considerations that may be noted when there is no compliance needed:
- The funding company may have a larger reserve on your other non-government accounts, that can cover losses if something goes wrong with the Federal government accounts.
- The funding company may feel safe enough with a regular Uniform Commercial Code (UCC) filing on your receivables–and no compliance with the Federal Assignment of Claims Act– as the UCC filing usually gives them priority in collections over third parties if money is ever wrongly sent to those parties. The funding company may know that if monies are wrongly sent to you, they may sue you under their funding contract and/or under a personal guarantee.
- No compliance may be needed when a business is operating normally and safely. But when things do go wrong with the government accounts, a payroll funding company’s contract may allow them to suddenly adjust advance rates, reserves, rebates due to you, or return of your profits that normally comes with collections. It may allow the funding company to determine that you are suddenly in default of the financing contract. Or they may suddenly change credit limits on accounts (both governmental and non governmental.) In many funding contracts, much of what funding companies may do is ‘at their discretion’.
Assurance of Finality of Government Invoice Payments
One reason why payroll funding companies, factors, banks, and other lenders comply with the Federal Assignment of Claims Act is that it protects from ‘setoff rights’. Setoff rights are some reduction of payment for other claims the government has against you that may have nothing to do with the specific contract being funded. They are an ‘offset’. Understand that the government has thousands of agencies, bureaus, and departments, however, it is one giant creditor and one giant debtor. Some other department of the government may have claims against the funding company customer, separate and apart, or unrelated to the contract being financed by the funding or factoring company. So the government may reduce or setoff the amount being paid. When the Federal Assignment of Claims Act is complied with, it protects the funding company from other claims that may be asserted by the government– stops the government from any setoff rights.
The Act if complied with also prevents a ‘clawback’ on the funding company. Once the funding company receives payment, the government cannot clawback…try and recall paid monies…because the government has a claim against the supplier contractor. Payments are final. This actually protects the government because under the law, once they pay the funding company it discharges their obligation on the contract. The funding company likes the non clawback feature because once the funder receives payment they know the government cannot clawback because the government has a claim against the contractor.
Payroll Funding Contract Modifications for Government Receivables
If you have the Federal Government as a customer (or prospect) you may want to pay attention to funding contract provisions that apply to those receivables. Such provisions may be in the body of the main funding contract, or in a supplemental amendment. If you don’t have government receivables when you initially research funding companies, or initially sign up with a funding company, you may want to find out if there is a related amendment (done at a later time)…to allow for government funding/factoring. Funding contract provisions, contract modifications, or supplemental amendments may include some of the following for funding Federal paper:
- Additional definitions such as what is a government obligor, an eligible government receivable, or which government manuals must be followed for each type of receivable
- An expansion of representations and warranties that you/your company might make to the funding company. For example, representations and warranties that there has been no prior termination for defaults, that there are no suspension proceedings going on at the current time or pending, or that the staffing company is in compliance with all wage and hour laws
- Requirements that the customer is properly registered in specified government systems and that there is continued access (for both the customer and the funding company) to online systems or certain government procurement personnel for invoice tracking
- The customer must give prompt notices of terminations, wage claims, setoff claims, etc.
- There may be extra validity guarantees or personal guarantees to stand behind the representations and warranties
Miscellaneous Items about Government Receivables
Not all contracts are assignable. The government does issue some–not many– non assignable contracts. Assignments of receivables do not apply to Medicare, Medicaid or any other government healthcare reimbursements; they must be paid directly to the provider.
Bonding companies must be informed—assignments must be sent to any surety or bonding company on the contract. If the staffing company breached the contract and a surety had to step in and complete the contract, the bonding company would have priority over the funding company in receiving monies. If the the bonding company is not notified about an assignment, the funding company risks losing protections under the Act.