Commercial Factor Q&A: Jason Medley Discusses Participations, Assignments and Re-Factoring

In a preview of a panel at the IFA’s Annual Conference in May, Jason Medley, Esq., of Clark Hill provides a top-level overview of participations, assignments and re-factoring.

The International Factoring Association’s upcoming Annual Conference will feature a breakout session panel covering all the ins and outs of participations, assignments, take-outs and re-factoring. Jason Medley, Esq., a member at Clark Hill, spoke with Commercial Factor to scratch the surface of the topic as a preview.

What are the instances where a participation makes sense for a factor?

Jason Medley: Participations are born from “lending limits.” Most factors will seek out participants when they’ve landed a deal in the pipeline that is above their capacity. Bank-owned factoring houses and private commercial finance companies all have institutional limits, and when they have a prospect that needs more than what they can give, seeking a partner in the deal saves the day. Also, participants make sense when a factor otherwise simply wants to hedge its bets; perhaps another factor will take on certain account debtors that are unattractive to the lead factor, for example.

What are the keys to a successful participation agreement?

Medley: Trust. The participant is relying on the lead factor to interface with the factoring customer and the account debtors, and is relying on the underwriting conducted by the lead (although the participant can run shadow due diligence). The lead controls the cash, so the participant needs to deal with a lead whom they know and trust. It doesn’t matter how tight a lawyer makes the participation agreement.; dealing with a trustworthy lead is what rules the day.

How can factors make sure to keep the first lien when taking part in a participation?

Medley: Participants can easily run a search to reflect (to make sure the lead is in first position) prior to first funding. Some participants will take a lien too. Teaser alert: We will discuss this in the panel!

What should factors be careful of when it comes to participations, particularly if things go badly? 

Medley: Leads have flexibility in most participations, but participants need to be careful about account debtor limit variations and other deviations and workouts from leads that may go rogue.  Keeping your finger on the pulse of the adjudication of the deal, having access to the reports and online portals and making sure that the participation agreement is true sale compliant are all important factors (This is where your lawyer comes in handy on the front end). It is also crucial to make sure that that the lead conducts verifications and reverifications, has a good NOA process, has a solid lockbox process that is not subject to the lead’s lender (if there is one), and has communicated any material defaults or account debtor disputes to you.

Have participations become more or less common in the last few years? Why? 

Medley: As the lawyer on these, I have seen them be more common recently. I think the max line that prospective clients need has grown, and I think lending limit pressure or other internal guidance has increased, making it more necessary to find a participant. And with many new entrants in the market, there are many more possible participants, so participations have grown even if they aren’t needed per se.

Switching gears a bit, why are notices of assignment important in factoring?

Medley: You cannot enforce double liability or truly have cash dominion otherwise.

What are the keys to an effective notice of assignment? 

Medley: I prefer that they be countersigned by both the factor and the factoring customer (therefore meeting the “authentication” requirement of the UCC). They must state that all present and future invoices have been assigned. They must state that changes cannot be made without the factor’s written approval (more on this topic during the panel; e.g., requiring that changes must be verified via phone to the factor).

Has the importance of assignments changed in the last few years? If yes, how so? 

Medley: No, it’s always been important to document an assignment if you need to jump over an intervening creditor. It is important to have an assignment agreement and a UCC3 assignment. We will discuss this further in the panel.

What exactly is re-factoring and what should factors know about the process? 

Medley: This is a bit of a misnomer; it often just refers to lending money to a factor so they can have working capital to buy invoices. The lender is not usually buying invoices from the factor that just bought invoices. Many new factors are looking for competitive pricing to reduce the spread, which is leading to more factors and commercial finance companies (in addition to traditional banks) offering asset-based lending deals to factors.

Is re-factoring becoming more or less common? Why? 

Medley: More common, but it is ripe for fraud. We will discuss this in greater detail in the panel, with a few actual case studies involving the FBI. Fun stuff.