LEVERAGED ACCOUNTS RECEIVABLE
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 used the loan proceeds to
invest in life insurance purchased by the business on the owner’s
life. Debtors 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 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 accounts receivable business
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.
