Payroll Funding on Collateral of ‘All Assets’
Steve Capper, Principal/CEO/Flexible Funding - July 19, 2017
Staffing companies and other business seekers of payroll funding, factoring, or financing are too often focused on pricing to the exclusion of other important elements.
The legal description of security for the loan, or collateral, must be scrutinized before signing up with a funding company. At one
end of the spectrum a funding company may be secured only on accounts receivables or invoices. At the other end of the spectrum, the payroll funding company may list ‘all assets’ of the business or debtor as the collateral. The pledge or lien of all assets is generally known as a ‘blanket’ lien, as it covers everything. As you will read further below, and unbeknownst to most people, a blanket lien may encompass a shocking range of assets.
In temporary staffing companies the primary asset of the business is the accounts receivables, and that is what a funding company may loan or advance funds upon. The staffing company may have other assets, but most often there is no separate payroll funding contract language or loan formula to lend monies separately against those other items. Nevertheless, the funding company in their blanket filing against ‘all assets’ will legally grab them as additional collateral/security, and may collect out on them if they need to. Dazzled by other funding company enticements (softwares, price teases, a game of golf with the funding company sales rep, etc.) staffing company owners often sign up to give away all assets. In the payroll funding marketplace for staffing agencies, there are many good lenders that will fund/advance based on accounts receivables ONLY, and advance the exact same amount as lenders who take all of the assets of the business as collateral. And the pricing–when made apples-to-apples– is the same. So why give ‘all assets’ away when you really don’t have to?
It may only be for a lack of information or legal advice that the staffing company owner or it’s management pledges away all assets. In rare cases, the funding company may actually be more lenient in their lending practices with a staffing agency when they have additional collateral covered by a blanket filing on all assets. More often than not, it is nothing more than extra security which lessens loan risk.
Outside of the staffing industry, a business may have other assets beyond accounts receivables, such as inventory or equipment. A funding company may have a formula(s) for lending against the different assets of one business, at the same time, under the same funding contract. For example, they will lend up to eighty five 85% of the accounts receivables, and also up to twenty five 25% of the value of the inventory.
‘All Assets’ Can be Extensive–Examples
With the exception of bankers, commercial lenders, certain attorneys and some very astute business people, few people have any idea of what the generality ‘all assets’ of the debtor may encompass. It may include all assets of the debtor, wherever located, whether now or hereafter existing, owned, licensed, leased, consigned, including without limitation:
General intangibles, meaning all personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments and money, business records, deposit accounts, inventions, intellectual property, designs, patents, patent applications, trademarks, trademark applications, trademark registrations, service marks, service mark applications, service mark registrations, trade names, goodwill, technology, know-how, confidential information, trade secrets, customers lists, supplier lists, copyrights, copyright applications, copyright registrations, licenses, permits, franchises, tax refund claims, any letters of credit, guarantee claims, security interests, or other security held by the debtor to secure any accounts. All of the accounts meaning any right of the debtor to receive payment from another person or entity, including payment for goods sold or leased, or for services rendered. It includes accounts, accounts receivable, contract rights, contracts receivable, purchase orders, notes, drafts, inventory, packaging, manuals, instructions, all raw materials, work in process, or materials used or consumed wherever located and no matter who is in possession of them, equipment, machinery, tools, office equipment, supplies, furnishings and furniture and accessories, attachments, tools, parts and supplies used in connection therewith, or other items used or useful directly or indirectly, all accessions, attachments and other additions, all parts used in connections with packaging, manuals and instructions. All proceeds from the sale, transfer, or pledge of any or all of the forgoing. All accessions, all litigation proceeds and all substitutions, renewals, improvements and replacements of and additions to all of the foregoing. All books, records, and computer records in any way relating to the property described.
Funding Agreement Clauses Affected by ‘All Assets’
Before a lender takes ALL assets as the collateral (and files a UCC-1 Uniform Commercial Code document filing on your company at the Secretary of State perfecting a legal interest in, and informing the pubic of the security interest in the collateral ) one must closely examine the funding agreement and all of the possible related contractual effects:
Covenants or negative covenants in the funding agreement may restrict why, when, how, and where you encumber, pledge, sell, assign, liquidate, license, borrow against, or in any way transfer any of those assets. Breaking such covenants may constitute a default of the funding contract– in other words, there can be a wider range of default circumstances.
One must check all clauses in the contract related to responsibility for legal costs. Click Here for an idea of how far these legal costs may climb. Specifically, you may now be responsible for all legal costs to protect the lenders interest in collateral other than accounts receivables if applicable (any attempt to inspect, verify, preserve, perfect, or continue the perfection of the lender’s liens upon the collateral, or to restore, collect, sell, liquidate or otherwise dispose of the collateral).
When a collateral description goes beyond accounts receivables, one must examine the personal guarantee that goes along with the funding contract and/or get the advice of a competent attorney. A person signing a funding or payroll factoring contract might be thinking they want the funding company to have all and every kind of ‘business collateral’ because they believe that if there is a default of the funding contract, the funding company must liquidate all of the ‘business collateral’ before they can legally go after one’s personal assets. That is not always true. In many personal guarantees, the lender does not have any obligation to go after business assets, or ‘exhaust their remedies’ against the business assets, before attacking personal assets.
Third Parties Concerned about ‘All Assets’ as Funding Collateral
There is another possible problem when a funding company perfects it’s loan on all assets. There may be other parties that will be secured on the same assets as the funding company, such as leasing companies or SBA lenders. These other parties would like to know if there are multiple parties (including themselves) secured on the same assets, and sometimes the various parties have to work out legal agreements known as ‘inter-creditor agreements’ whereby everybody agrees, beforehand, who gets what in a financial/legal meltdown situation. These agreements are done as soon as the funding company gets a signed contract covering all assets as collateral, not just before or at the beginning of a business meltdown.
There are even suppliers with financial service arrangements that will simply refuse to do business with you as soon as they learn of other parties that are secured on the same assets. For example, as your company grows you may need to lease computers. The leasing company may refuse to lease you computers when the funding company has all assets, because the funding company has legally taken all of the equipment as collateral. In this case, a ‘subordination’ agreement may have to be worked out so that the leasing company is moved into legal first secured position on the computers/equipment, ahead of the funding company. And, if the funding contract provides that you pay for all legal costs and expenses, guess who may end up paying for the subordination agreement?
Lastly, whenever you fill out any paperwork to renew contracts with any of these multiple secured parties (secured on the same collateral), whether it is annually or otherwise, you will likely have to disclose that there are other entities secured on the collateral.