Published in IFA Commercial Factor
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a comprehensive legislation in response to the COVID-19 pandemic signed into law on March 27, 2020 by President Trump, establishes programs and initiatives intended to provide immediate assistance to business owners through a massive $2.2 trillion economic stimulus package. However, as the CARES Act is one of the fastest-moving pieces of legislation in U.S. history, the resulting specific implementation and administrative rules and regulations are still being issued, and qualified lenders expect to be inundated with applications. Factors may be faced with requests for client overadvances or other financial accommodations pending receipt of CARES Act benefits by their clients. In considering these requests, there are several dynamics factors should consider.
Stay Consistent
First, factors should adhere to existing structure and procedures for additional financial accommodation, such as an overadvance. As factoring clients face cash flow issues and financial instability, many may be struggling for survival and request an overadvance to stay in business, while others may have growth opportunities in supplying essential products or services. The current environment should not change a factor’s risk and collateral analysis, but factors may have a different evaluation in making the analysis for an overadvance in light of benefits a factoring client may receive under the CARES Act.
It is important that factors not deviate from underwriting policy in this unprecedented environment. In making an overadvance or other financial accommodations, a factor may be relying on receipt by the factoring client of CARES Act benefits. With the CARES Act providing an opportunity for significant funds available to businesses on an expedited basis, there is an inherent risk of fraud, which is one of the most significant risks to a factor. In the event receipt of CARES Act funds is a consideration in providing an overadvance to a factoring client, a factor should request copies of all documentation submitted in connection with a CARES Act application, including all supporting documentation, and confirm the documentation is accurate and consistent with the existing information the factor has regarding the client.
The Payment Protection Program
One program that factoring clients may particularly benefit from is the Paycheck Protection Program (PPP), which provides businesses with funds to pay up to eight weeks of payroll costs, including benefits, from the origination date the client maintains or re-hires employees. In summary, the PPP provides for a low-interest loan with loan forgiveness if employees and employee wages are maintained through June 30, 2020, and if the money is spent on specific expenses, including payroll costs. This program is available for any small business with fewer than 500 employees. PPP loans will be forgiven if funds are properly utilized, and if 75% of the forgiven loan was used for payroll. However, some factoring clients may need an overadvance pending receipt of PPP funds. If a factor is relying on receipt of these PPP funds in evaluating an overadvance request, the factor should be certain to receive all documentation submitted by the client.
Consent
The legal documents of factors will likely require the factor’s consent to any loan under the CARES Act. The factor should document this consent, including (i) all the terms and conditions of the CARES Act loan to the factoring client, (ii) repayment obligations and requirements for debt forgiveness, and (iii) agreement that factoring client will comply with the loan provisions and loan forgiveness conditions. It is important the factor is aware of what it is consenting to and what the obligations of the factoring client will be. As PPP loans must be used for a specific purpose to qualify for loan forgiveness, the factor will want to understand how the loan proceeds will be used, and may include in the consent documentation and reporting requirements. The factor will also want to determine if the factoring client will have the cash flow available upon the loan maturity, as applicable.
Factors may receive a request to monetize funds a client expects to receive under the CARES Act, including the PPP. While receipt of funds may be considered by a factor in the analysis of approving and making an overadvance, the proceeds of the PPP must be utilized for specific purposes, including payroll. Therefore, the client may be at risk if the factor controls the receipt of the funds, or the funds are paid over to the factor. These considerations must go into structuring and documenting any overadvance.
Prior to making an overadvance, a factor should ensure such overadvance is in compliance with the loan documents with the factor’s lender, including the collateral, overadvance and borrowing base requirements. Any structured client overadvance should be properly documented, including all relevant terms of the financial accommodation, and signed by the client.
Communication is Key
It is critically important that factors ensure their front line staff is properly communicating with clients in connection with requested financial accommodations and overadvances. The terms must be clearly understood by the client. Factoring clients may ask their account professionals for information regarding the CARES Act or may not be aware of potential benefits, particularly in light of the rapidly changing information on the CARES Act programs. As a factoring client may need benefits available under the CARES Act to remain in business, which is typically in the best interest of a factor, it is important for a factor to be prepared to provide information to factoring clients on relevant programs under the CARES Act.
Providing CARES Act information also gives a factor a unique opportunity to provide invaluable assistance and service to a client. Factors should make certain their employees interfacing with clients are instructed in how to respond to client inquiries regarding the CARES Act. While providing information is acceptable and encouraged, factors also want to be certain employees are not providing advice or actual instruction to clients. Factors should consider posting links in their websites to the relevant government websites which are providing information and applications for CARE programs. Employees can direct factoring clients to these resources, and clients can easily and readily assess the relevant information.
One of the benefits of factoring is that factors are structured to make immediate decisions for quick funding for clients. These attributes can be leveraged with resources expected to be provided under the CARES Act to benefit factoring clients and provide an opportunity for factors to provide additional and critical information and assistance to their clients. Ensuring a client has access to the information that may enable the business to stay financially viable maintains a solvent factoring client relationship and reduces the ever-present risk of fraud in a stressed situation.
Finally, factors should remain informed on the CARES Act, whether the factor may benefit from any programs under the CARES Act, and if their organization can qualify to become a certified lender with delegated authority to process benefits under the CARES Act.
Resources
Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
U.S. Department of Treasury: Assistance for Small Businesses: Paycheck Protection Loans
Businesses Ineligible for SBA Business Loans
Calculating Number of Employees: Small Businesses
Calculation of Annual Receipts: Small Businesses
COVID-19: Small Business Guidance-Loan Resources
Disaster Assistance Loan Application
Economic Injury Disaster Loan Program (EIDL)
Grant Funding for Small Businesses
Size Standards Defining Small Businesses