By Thomas J. O’Connor
Some businesses are getting pressure from their best customers to enter into receivable financing arrangements that look like a guaranty of faster payment. This practice, being forced by the customer’s bank, is yet another pounding on auto suppliers and there is evidence that it is spreading to other industries as well.
Offered by major national banks, these deals place in doubt the sales that have already been nailed down. What may appear to be an innocuous financing proposal turns out to be a binding contract in which the supplier agrees, in advance, to take whatever payment the bank determines is appropriate instead of the amount originally agreed upon.
Assume that your company’s biggest customer has been gradually lengthening the time it takes to pay your invoices. Your customer’s bank then steps in and offers a deal that may be appealing. The bank will buy your receivables from your customer and wire transfer the funds to you so that you are paid earlier. But here is the catch: you agree in advance that the bank can buy the receivables, but it is not required to do so. You also agree in advance that the bank can set its own discounted price and its own terms.
In the version offered by some banks, the discount is equal to an external index plus a “spread” determined by the buyer’s credit rating. In other versions, the discount is just whatever the bank chooses to offer. For example, the bank can decide that it only wants to pay sixty cents on the dollar and that it will pay in another fourteen days. If you do not like that deal, you are out of luck. You have signed a contract that says you can get out of this on a thirty day notice, but as to the current receivables, you have “accepted in advance” the bank’s offer to buy on whatever terms it chooses.
If your customer’s bank says the customer can only buy from suppliers that accept this arrangement, what can the supplier do? If it accepts the arrangement, it will never really know how much the purchase order is worth until it gets the money.
Can a bank really force you to do this? Under current law, the bank will have to show that its discretion is somehow limited. But until that happens, it is hard to assess the risk of a supplier agreeing to this arrangement. Or, maybe the courts will just throw out all these agreements as unenforceable.
What can you do?
First, one must be vigilant. Do not sign something that you do not understand. Make sure that you are not giving the bank the right to determine how much you will get paid or when you will get paid.
When you do get a proposal to buy your receivables, dressed up in language that seems to take away your collection risk, and gets you paid early to boot, be careful. Resist the temptation to sign whatever your customer wants.
Maybe most important, enlist your own bank to help fight the pressure to give away your hard-earned receivables. Chances are good that by signing what you are given, you will be defaulting on your own bank agreement. Blame your own bank for the fact that you do not want to give away part of your revenue.
For further information regarding these matters, please contact Mr. O’Connor at 248.740.5691 or
click here to send an email.
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