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Additional Products the Small Factor Can Sell
by David Jencks, PC
In addition to the financial product of Factoring, there are other financial products the small factor should consider
offering for sale. These products are ones that your factoring clients will oftentimes need to do for union work or to insure delivery of goods and services from its supplier, also known as its “vendor.”
Therefore, the small factor should consider offering Letters of Credit and Supplier Guaranties for those clients who are in
need and meet your credit criteria.
A Supplier Guaranty is a documented agreement that you offer to your client’s Supplier/Vendor to induce them to sell goods and
services on credit to your client. This inducement allows your typically undercapitalized client with less that strong credit to receive the goods and services necessary to produce its product for sale.
The Supplier Guaranty promises to your client’s Supplier that you will guarantee ultimate collection of all obligations of
your client to the Supplier. Needless to say this comes with inherent potential risk in that if your client fails to meets its obligations to its supplier, the supplier will be able to look to you for ultimate
payment.
However, there exist some protections you can employ to limit your liability when selling this product.
First, you should have an agreement with your client that the remaining proceeds (after your factoring discount fee) of each factored invoice can be applied to the open obligations existing with any supplier to whom the factor has granted a Supplier Guaranty. Also, any agreement to issue a Supplier Guaranty should also come with the provision that you have full right of recourse and indemnification against your client for any funds expended under the guaranty.
As further protection, you can build into the guaranty the agreement that you can terminate the guaranty on a certain number
of days notice. This will not alleviate you on the past obligations of your client to the Supplier, but it will alleviate you from future obligations from the date of notice of termination of the Supplier
Guaranty. The guaranty should also indicate that the Supplier Guaranty document cannot be modified unless agreed to by both parties in writing.
The Guaranty should also set forth a credit limit with each Supplier/Vendor is capped at a certain level and any exceeding of
that credit limit by the Supplier to your client will not be honored or covered under the Guaranty.
Lastly, your Supplier Guaranty should indicate that all claims asserted by the Supplier against you under the guaranty must be
asserted in writing and must be actually received by the officer signing this guaranty within sixty (or so) days of the Last Ship Date or the guaranty will be null and void with respect to those invoices or purchase
orders.
Your fee structure for this product can be based either on a flat fee per Supplier Guaranty issued or a dollar amount per
thousand dollars of guaranties issued. The Supplier Guaranty can be a lucrative product offering that carries only a small to average amount of risk if properly documented.
I have Supplier Guaranty request and Supplier Guaranty forms in my form bank and would be pleased to work with you in
preparing a generic document for you to alter for a specific deal, or help you document a specific supplier guaranty deal.
Another product the Small Factor could consider offering for sale is the Letter of Credit.
A Letter of Credit is a document issued by you on behalf of your client that commits yourself to honor drafts and demands for
payment by the customer upon full compliance with the conditions specified in the terms of credit. This financial device essentially allows your client to use money on your credit. It assures the
receiving party that it will be able to draw funds from the issuer in the event of a valid unpaid claim against your client.
A classic example for the use of this document is when you factor a subcontractor (say a painter) who wants to be able to
participate in the bidding and completion of Union contracts or subcontracts.
Almost all unions require that the union eligible contractor either place a significant deposit with the union to cover the payment of all Union dues, fringe benefits payable to union members as well as damages incurred for incomplete or improper work.
Many small contractors or suppliers do not have the ability to place a large cash deposit with the Union or other requiring
party, and therefore, the union or other party agrees to accept a Letter of Credit from a qualified third party who promises to pay, upon valid demand, the cash sums requested to fulfill the obligations of your
client.
A Letter of Credit carries the approximate level of risk as a Supplier Guaranty. It is essential to have the document
drafted to be paid in a specified maximum amount, upon valid explained demand for funds, and that you as the issuer have full recourse and right to indemnification for any funds expended from demands on the letter
of Credit. Specifying the terms and conditions of payment and the form in which the demands for payment must be received is also very important.
The pricing structure for a Letter of Credit is usually very similar to that of a Supplier Guaranty.
I am also happy to work with you in creating a Letter of Credit and Credit terms for you to sell.
These products, in addition to more common financial accommodations will increase your profitability and create longer lasting
relationships with clients.
Please do not hesitate to contact me should you wish to discuss this article or financial products further.
I can be reached at davidjencks@myway.com or 605-256-0121.
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David Jencks is an attorney whose practice specializes in factoring law for small factors. He recently gave a well-received
workshop in Chicago on Transportation Receivables, and provides the
Legal Documents available from Dash Point Publishing.
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