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02-10-2016, 12:40 PM #1
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THE FACTORS ARE COMING, THE FACTORS ARE COMING. Not the Russians, the FACTORS
Recently a conversation has been going around the factoring and ABL lenders about the situation caused by advance lenders granting an advance to a client that they know is factoring their receivables. Virtually all factors have include in their agreements that the client may not borrow any additional funds without the secured lender's permission and advance lenders know that. For those companies that enter into an intercreditor agreement the problem is resolved. One of the arguments that was dismissed was that he advance may represent a purchase of future income. However, for most companies financing their receivable the bulk, if not all, of the company's revenue comes directly from the factor. How can an advance company purchase receivables that the factor has a lien on and will own?
If it came to the point that the secured lender felt insecure they could defaul their client and notify the debtors to pay all invoices directly to them resulting in little to no cash flowing through the bank account the advance draws from.
Bob Shaw
Advance Credit Funding Corporation
734-929-3800
rshaw@advancecredit.com
rshaw@millenniumfundingusa.com
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02-10-2016, 01:43 PM #2
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- Mar 2015
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- Boynton Beach
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Bob,
Most bank factors and non-bank factors use lock-box systems that are controlled by the factor and or bank. Some ABL lenders do as well.... That being said, cash from all receivables is controlled through the lockbox. An ACH withdrawl could never happen through the lockbox, but can happen through the Company's operating account. Most lenders will cover all the assets of the business in the lender's agreement up to and including cash. If a business owner and lender enter a subsequent agreement that allows any asset to be used as collateral without the first lender's approval or a subordination agreement, one could certainly argue default, interference, and fraud. One should think about this when entering an agreement that disrupts and agreement with an FDIC insured institution....Kevin Henry
VP-Business Development
Seacoast Business Funding, a division of Seacoast Bank
561-850-9346
Kevin.Henry@SeacoastBF.com
1880 N Congress Ave., Suite 404
Boynton Beach, FL 33426
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02-10-2016, 02:27 PM #3
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- Ann Arbor, Michigan
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I understand what you are saying Kevin but you missed my point. My discussion has to do with the advance company that collects by ach from the client's operating account could find the factor not depositing anymore advances or reserves into to it until they are paid out. This will dry up all but a minimum amount of available cash and often results in the company going out of business. A lockbox has nothing to do with it. As for the FDIC I thank you for pointing out that the advance company may be breaking a federal law and that will lead to more grief than losing money.
Kevin I would appreciate you comments on my post of creating a hybrid factoring/advance product. We both seem to deal with both and your input would be very valuable to me.
Bob
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02-10-2016, 02:41 PM #4
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Bob,
I completely got your point about the senior lender cutting off the operating account in attempt to stop advances. I was merely pointing out that it can go much deeper than just turning off the cash.
A hybrid product sounds interesting, but if you are working with the right lenders their should not be a need to borrow from anther lender if and when a need arises. If you are working with a cost effective lender the savings alone should help with additional working capital needs. Most good senior lenders will know enough about their customer and be willing to advance enough on the current assets when they need additional funding from time to time.
Best,
KevinKevin Henry
VP-Business Development
Seacoast Business Funding, a division of Seacoast Bank
561-850-9346
Kevin.Henry@SeacoastBF.com
1880 N Congress Ave., Suite 404
Boynton Beach, FL 33426
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02-10-2016, 02:43 PM #5
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- Dec 2014
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- Quogue, NY
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- 1,108
Bob, the ACH debit firm knows going in the inherent risk and prices the file accordingly.
It isn't any different than a firm that has a blanket UCC 1 on all of its assets getting a revenue generated credit instrument behind it. The verbiage is that this is an advance (NOT A LOAN) and accordingly comes with greater risk to the funding firm. They're technically not breaking the law but rather walking a fine line.
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02-10-2016, 03:31 PM #6
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- Mar 2014
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- Ann Arbor, Michigan
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- 1,289
Kevin you are correct but keep in mind that many of the credits we see will not qualify with what you call a good lender may not have enough invoices to expand their line and must rely on collateral that a factor won't finance. An ABL that considers other assets as collateral may be the best financing for the client. However, in reality look at all the borrowers that migrate to the advance world in violation of their basic loan agreements.
I also agree with Richard except we have not seen enough court decisions to see if the courts will look at an advance as a loan. I believe the FDIC will take the position that anything that puts a bank in a risk not related to credit would be breaking some law.
Thanks for the spirited conversation guys. I hope more folks jump in as this is not a bad way to hear thoughts from people we respect.
Bob
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02-10-2016, 03:56 PM #7
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- Mar 2015
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- Boynton Beach
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Bob,
We are owned by a bank, but can provide working capital to subjet businesses. We have provided cost effective working capital solutions to many companies that don't have one dime of equity on their balance sheet, poor credit of the owners, CH11, tax liens, etc.... What I meant by good lender is one that can provide a flexible working capital facility that also has a low cost of funds so the client can get a more cost effective facility. We have and will advance to clients on other assets or over advance on assets when they need it.
Example: We recently proposed a factoring facility for a service business that had 3 ACH instruments behind another factor. We offered the client a more cost effective factoring facility with a higher advance rate. The cost savings from the factoring switch is significant allowing the Company to use the savings as extra working capital and expedite payments on the ACH facilities to get them off the balance sheet. Over twelve months the factoring cost savings is in excess of $400,000. By the way...that goes right to the bottom line.Kevin Henry
VP-Business Development
Seacoast Business Funding, a division of Seacoast Bank
561-850-9346
Kevin.Henry@SeacoastBF.com
1880 N Congress Ave., Suite 404
Boynton Beach, FL 33426
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02-10-2016, 04:37 PM #8
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- Ann Arbor, Michigan
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Kevin, I really did not write this post for any of us to plug our companies as you seem to be doing by wandering far from the subject of this thread. However you and the bank are not offering anything that folks like Richard and myself don't offer everyday.
I know I have put deals together that a bank or a bank owned factor would reject in a heartbeat including deals that bank owned factors have rejected.
My point in this entire conversation is an advance company who comes behind a factor with no agreement with the factor puts themselves at greater risk for loss than just the underwriting risk.
I would like to hear opinions on that subject possible from some of the unsecured lenders and get their take.
This is a good opportunity for all of us to learn something.
Bob
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02-10-2016, 04:50 PM #9
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- Mar 2015
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- Boynton Beach
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Bob,
Really was not trying to toot my own horn. I was really using how we approached a deal as an example.
Best,
KevinKevin Henry
VP-Business Development
Seacoast Business Funding, a division of Seacoast Bank
561-850-9346
Kevin.Henry@SeacoastBF.com
1880 N Congress Ave., Suite 404
Boynton Beach, FL 33426
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02-24-2016, 06:07 PM #10
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- Sep 2015
- Location
- Miami, FL
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- 189
THE FACTORS ARE COMING, THE FACTORS ARE COMING. Not the Russians, the FACTORS
I know of a very well respected attorney in the factoring space who is gearing up to go after cash advance lenders who have caused tortious interference so if any cash advance lenders out there are not signing intercreditor agreements with factors who hold a first position, they might be in for a surprise soon.
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02-24-2016, 07:03 PM #11
These kinds of campaigns against MCA companies have been going on for years. From what I know and have seen out there, there's a very high threshold for a tortious interference claim. Nonetheless, if anything is clear, it's that the sheer amount of litigation taking place in this industry is the reason that 2 guys in their basement should not go out there and try to become a funder. Barriers to entry in becoming a funder may be low, but the toll to actually play the game is very high.
If you are not well lawyered up, don't bother becoming a funder. You'll get crushed.
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