Working capital provider or not: Be careful when money changes hands!
Whether factoring invoices or offering a signature loan, funders and lenders – as well as you as a buyer of goods and services – should do some homework or be prepared for a rude awakening if things aren’t in good order with whom you do business with.
IMAGINE THIS ONE … You buy that new Ipod or the like and a few days later the police knock on the door and demand it back because it was from a shipment that was stolen … or someone registered a judgement against the store that sold it … or the IRS decided to liquidate the seller.
“They can’t do that!” you say? Actually they can and often times go back as long as 90 days after the actual transaction was executed …
Long since do I remember the supplier of a $40K (+) copying machine that sold it to a company having 941 issues and two months later the IRS put their foot down and unraveled the transaction and he had to take back the machine and give back the $40K so that IRS could take it. Oh … one other thing: He couldn’t send the machine back to his supplier and had to eat it. It happens …
The point herein? Did you ever give thought to whether what you buy is free and clear of encumbrances and that nothing will disrupt the transaction further down the road? For the most part I don’t … not unless I’m buying an invoice or lending.
That said: Learn from what invoice factors and lenders ask what they do and do so in an ongoing manner i.e. they need to ensure that the invoice and collateral is real, not pledged to someone else, and not in jeopardy of a third party swooping in and causing a problem. You too should be aware of this during these times or that “deal” may not be such a deal after all. It seems like it’s a pain but the reality is that this awareness actually makes you a better and more secure business … tough though it may seem at times.
Did you ever give thought as to why banks go to the lengths they do to ensure your assets and records are in good order before they will lend you money … and then race to the courthouse to register their UCC’s and/or liens? There’s a reason for it …
Along that line? I recently came across a borrower who had a lender they walked away from for millions because the lender had not secured themselves properly … and it was 100% legal.
Why do we ask what we do, when we buy invoices, and ask what we do about invoices when we buy them and shudder when we look at what companies such as the Receivables Exchange do? It’s simple: We don’t want to “get the invoice home” and hear a knock at the door because something is wrong such as the invoice isn’t real and/or the customer didn’t get the product they were promised. Face it: Factoring Fraud is a big problem!
That said: If you ever consider buying an invoice? Make sure …
■The invoice is free and clear of all encumbrances
■There are no covenants governing it
■Whom you are buying the invoice from has no liens, encumbrances, and/or whose assets are not controlled by an agreement and/or covenant
Why do lenders ask what they ask? They need to do all that they can to ensure that the payment stream a borrower says they have is free and clear i.e. are their 941’s and/or other obligations paid etc.?
This is why …
■Factors only buy invoices for work that is completed and can be shown to be complete … oh: And why they contact your customer!
■Invoices must be free of liens and not being used as collateral for other loans and/or cash advances
■The company must have their 941’s (Payroll trust money) in good standing as well as their taxes filed
■The company must be registered in good standing with their respective state
■If a companie’s net worth is negative and there are large payables these must be worked through
The same should apply for all lenders … as well as companies transacting business with other companies … and not just funders! To boot: Keep this in mind if you are buying something from a distressed company or you could lose your money and the property!
Seem unreasonable? It’s not … asking the questions that most of us take for granted and probably shouldn’t can keep us from owning that infamous bridge in Brooklyn!
Yours in business … and the best to you and yours in Health, Happiness, and Prosperity!