The collateral evaluation process is necessary for ANAPLANS to form an exit strategy prior to funding a client.
ANAPLANS should never enter into a factoring relationship without an EXIT STRATEGY.
5.1 Payment Rights to Collateral
A Factoring/Lending arrangement is one in which the client sells its accounts to ANAPLANS who in turn advances funds to the client for consideration of the purchase. Accounts receivable are the most liquid form of collateral the client has. By liquid we mean that the accounts receivable is the easiest asset to collect.
Not only are accounts receivable the easiest asset to liquidate, the Uniform Commercial Code distinguishes the legal responsibilities of a seller and a buyer in secured transactions. ANAPLANS through the factoring relationship with its client becomes a secured party (“buyer”) against the assets (primarily accounts receivable) of the client (“seller”).
5.2 Perfecting the Security Interest
The client will agree to pledge as security for funds advanced by ANAPLANS their accounts receivable and other assets. Security is defined as property pledged as collateral. It is important to note that consideration must be given in order to legally collect the assets pledged as security. If ANAPLANS does not advance funds to the client pledging the security, ANAPLANS has no rights to collect on the assets.
ANAPLANS will file a Financing Statement (UCC-1)(PPSA) in the appropriate jurisdiction perfecting their interest in the client’s collateral. In other words, ANAPLANS is placing a lien upon the secured property of the client. This is similar to a mortgage holder filing a deed of trust in a home which was financed for an individual. The Uniform Commercial Code (UCC) records are generally managed by each State’s Secretary of State.
The Purchase and Sale Agreement, signed by the client, lists Security as:
Security. In addition to those Accounts Factor purchases, in order to secure the payment of all indebtedness and obligations of Seller to Factor, whether presently existing or hereafter arising, Seller hereby grants to Factor a security interest in and lien upon all of Seller’s right, title and interest in and to the following, whether now existing or hereafter arising or acquired and wherever located: (a) Accounts, (b) Chattel Paper, (c) Commercial Tort Claims, (d) Deposit Accounts, (e) Documents, (f) Equipment, (g) General Intangibles, (h) Goods, (i) Instruments, (j) Inventory, (k) Investment Property, (l) Supporting Obligations, (m) Letter of Credit Rights, (n) Payment Intangibles, (o) any and all Reserves and all payments (if any) due or to become due to Seller from the Reserves as well as all monies on deposit, holdbacks and credits, (p) all books and records pertaining to all of the foregoing, including but not limited to computer programs, data and lists, and (q) and all Proceeds of the foregoing (collectively the “Collateral”).
The Purchase and Sale Agreement also state that “Seller hereby agrees that until all Accounts have been paid in full to Factor, Seller shall not permit any security interests or liens on any of the Collateral, except those in favor of Factor, nor will Seller sell or transfer any of the Collateral to any third party, except inventory in the ordinary course of business”
Further more; the italicized language will be included in the UCC-1 Financing statement filed in the appropriate jurisdiction.
The UCC defines Accounts as “means and right to payment for goods sold, or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance”
5.2.1 UCC/PPSA Search
A UCC/PPSA search is an essential procedure in the underwriting of a Client. Recent changes to the Uniform Commercial Code statute in all states were enacted in July of 2001. The Service Provider is required to perform a search in the state in which the prospect is incorporated in, not where their corporate office or ‘books and records’ are kept. For instance, the prospect may have their headquarters in Utah, and their corporation is chartered in Nevada. The UCC search will be performed in Nevada.
Often times a client may already have their receivables pledged as collateral for other loans and the only way we can discover this is through the UCC search process. It is customary for an Equipment Lessor to place a blanket lien against the all assets of a client, even though Accounts have not been pledged as security for the equipment lease.
Typically if Accounts have been pledged to other secured parties, ANAPLANS can seek to have them subordinate their collateral position or payoff the previous lender in full from the proceeds of factoring the client.
If UCC filings are in place, and therefore in a priority position then ANAPLANS must seek to obtain subordination agreements or terminations.
ANAPLANS must have proof (in the form of a report forwarded by the Service Provider) that ANAPLANS is in a priority position against the A/R of each client.
ANAPLANS MUST BE IN FIRST SECURED POSITION AGAINST THE ACCOUNTS OF THE CLIENT BEFORE FUNDS CAN BE AVANCED.
Failure to confirm may result in a LOSS!
ANAPLANS will always seek to obtain a perfected collateral position against all assets of the client, but may take a junior position in the remaining assets other than Accounts or Inventory.
Assets not covered by the UCC include Patents, Copyrights, Trademarks, Motor Vehicles and Real Estate. Perfection of these assets is maintained by other regulatory agencies. ANAPLANS will not typically seek these assets as secondary collateral as the liquidation process is more difficult than liquidating Accounts Receivable.
5.3 Secret Liens
There are laws that protect certain parties’ rights to payment in the United States and Canada. Their rights supersede that of ANAPLANS even when ANAPLANS is the perfected senior secured party of record. The UCC search will not uncover these types of liens. ANAPLANS should seek attorney’s counsel if it appears that one of the items listed below is of issue.
Types of secret liens are
- Wages (Payroll)
Employees always take priority for unpaid wages. This may only occur if the client does not pay their employees - Withholdings (Taxes)
This may only occur if the client does not pay the payroll taxes withheld from employee’s compensation. - Mechanic’s Liens
If a party supplies goods or services and remains in possession of those goods, they may take priority over the possessed goods. - Warehouseman’s liens
If the client stores inventory at a contracted warehouse and does not pay the rent, the warehouse can take priority over the goods stored. - Landlord liens
Similar to a Warehouseman’s lien if a client does not pay their rent, the landlord may be entitled to the contents held at the lease. - PACA
This is the US Perishable Agricultural Commodities Act. Under this Act the grower has an automatic lien against inventory and proceeds in the event of non-payment. Recent changes to this Act have been helpful for secured parties to the extent that a lien may not be placed upon processed goods. For instance, if a factor purchases invoices from a food broker selling tomatoes to a retail outlet, and the broker does not pay the grower, the grower can jump in front of the factor and seek to be paid from the customer. However, if a packaging company purchases sun-dried tomato product from a processor, the grower’s lien rights to final customer are nullified, therefore making those invoices eligible for factoring.
5.4 Accounts Receivable Analysis
ANAPLANS should use their sound judgment when assessing the liquidation value of a client’s accounts receivable. Technically an invoice is just an itemized bill for goods delivered or services rendered. The actual terms between the customer and the client for those goods or services are reflected in the purchase contract.
5.4.1 The Purchase contract
Generally a client will be able to supply ANAPLANS a copy of a Purchase Order which lists the responsibilities of both the seller and the buyer.
ANAPLANS will review the Purchase Order to determine whether or not the Client has fulfilled their end of the contract, which ultimately determines if the account will be paid.
Items to review on a Purchase Order include:
- Who
Who is purchasing the goods (or services), who is supplying the goods (or services)?
ANAPLANS should confirm that the WHO listed on the Purchase Order as buyer is actually the customer who will be paying the invoice. Likewise is the WHO listed on the PO as Seller actually the Client?
ANAPLANS will make sure the buyer (the customer) has been approved for a credit limit by the Service Provider.
ANAPLANS will confirm that the seller of the goods or services is the exact legal name of their client or a registered trade name thereof. - What
What goods are to be delivered or what services are to be provided?
ANAPLANS will determine when reviewing an invoice to the purchase order WHAT goods or services were contracted to be delivered or provided.
For instance, the Purchase Order may state that the buyer wants to purchase 10,000 widgets at 1.00 each. Does the invoice reflect that 10,000 widgets were shipped at 1.00 each?
Another scenario that would require special handling would be a customer’s purchase order lists materials or services requested from the client, that ANAPLANS knows these are not goods or services that their client provides. Does this mean the client is sub contracting to another entity for these goods or services? If so, how could that affect the payment of the invoice? Does ANAPLANS have to confirm that the third-party supplier be paid to ensure that party could not lay a claim to the payment by the customer? - Where
Where are the goods or services required to be delivered/furnished?
The term FOB is important in this context. FOB means “Freight on Board”. ANAPLANS should know when title (of the goods) passes from seller (client) to buyer (customer). There are three common uses of FOB, they are:
Place of Shipment – Unless otherwise agreed, the seller must ship the goods and bear the expense of putting the goods in the hands of the shipper. The seller must notify the buyer of the shipment and obtain and deliver necessary documents of title to enable the buyer to take possession. The buyer must supply the seller with proper shipping instructions.
Place of Destination – Unless otherwise agreed, the seller at its own expense must transport the goods to the place of destination, give the buyer reasonable notification to enable it to take delivery, tender delivery at a reasonable time, and keep the goods available for a reasonable time to permit the buyer to take possession.
Car or other Vehicle – In addition to putting the goods in the possession of a carrier, the seller must load them on board the truck, car or other vehicle used by the carrier. - When
When are the goods to be delivered or the services rendered?
ANAPLANS will confirm that the goods were shipped according to the time frame required on the Purchase Order. Buyers may impose deductions on payment if the goods were not shipped according to the terms of the PO. - Rights
What are the rights of each party? i.e. if the seller abides by all these points, when will they be paid? What actions can be taken by the buyer in the event the seller does not fulfill their obligations? What actions can be taken by the seller if the buyer does not pay?
What are the payment terms listed on the PO? Terms of Consignment or Scan on Sale preclude the invoice from being eligible for factoring. We will explore below other terms which are not favorable to factoring.
5.4.2 Other Agreements
Other agreements may affect payment of invoices; ANAPLANS should talk to the client to determine if they exist. They are;
- Vendor Agreements
- Distribution Agreements
- License Agreements
- Maintenance Agreements
If any of the above agreements are in place between a client and their customers, client must supply ANAPLANS with a complete copy of the agreement. ANAPLANS will thoroughly review the agreement to see what the customer’s rights are and what their client’s rights are.
These agreements are generally buyer (customers) biased.
5.4.3 Special Handling
Consideration must be given to the credit quality of the client’s customer base. A customer base consisting of healthy credit worthy customers is much easier to liquidate than a base filled with poor credit quality accounts.
Listed below are categories of Accounts that should either not be funded by or ANAPLANS should question and take special care when considering some of the categories for funding.
Affiliated A/R,
Aging Categories,
Bill & Hold,
COD,
Concentrations,
Consignment Sales,
Consumer Based & Employee Receivables,
Credit Quality of Accounts,
Cross-Aging:,
Debit Memos,
Finance Charges,
Foreign Accounts,
Government Receivables,
Offset Rights,
Progress Billings,
Retention,
Samples,
Scan on Sale,
Terms of Sale,
Tooling