Accounts receivable are often a business’s largest liquid asset and are also an attractive target of creditors of either the business or its individual owner. A creditor can garnish accounts receivable before they are paid or the creditor can wait until after collection and garnish the proceeds deposited in the debtor’s bank account.
For many years, financial advisors have sheltered accounts receivables by “factoring” the receivables which means, essentially, pledging the receivables for loans from institutional investors at a discount from the receivables’ face value. The discount provides the lender a security cushion against collection problems and considers the time required for collection and receipt. The lender takes a security position in the accounts receivable as a condition for the money loan. The lender’s secured position in the receivables has priority over subsequent judgment liens against the same receivables.
The challenge for the debtor who pledges receivables for a loan is the subsequent protection of the loan proceeds received. Distribution of the proceeds to the owner leaves the money vulnerable in the owner’s hands, and if the business is the debtor, the distribution out of the business account to the individual owner may be challenged as a fraudulent conveyance. Many financial professionals encourage debtors to use the loan proceeds to invest in life insurance purchased by the business on the owner’s life. Creditors often object that the financial professional is using receivable financing primarily to push unneeded life insurance products.
A better alternative involves a secured institutional loan to the individual business owner and the purchase of annuities. Instead of the business being the borrower, the individual owner gets a loan directly from an institutional lender. The owner arranges for the business to provide the business’s accounts receivable collateral as security. The owner then arranges for the purchase of an annuity. The annuity may be pledged as additional loan collateral. Initial loan proceeds are paid not to the owner or the business, but are wired directly to the issuer of the annuity. This arrangement provides a better defense against fraudulent conveyance allegations because neither the business nor the owner has possession of loan proceeds in their bank accounts. Annuities are a better asset protection tool than life insurance because Florida Statutes protect not only the annuities themselves but also annuity proceeds after they are paid out to the owner/beneficiary so long as they are traceable. Using offshore products such as Swiss Annuities provides still another layer of protection.