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Payfoll Funding: How to stay ahead of the queue of creditors

An ever-present challenge facing financiers is how best to secure repayment of the money that they lend.  Traditionally, taking security over assets has been viewed as one of the best protections available.  However, through the use of “payroll funding”, it is possible for an otherwise unsecured lender to obtain for itself priority for repayment that can even outrank secured lenders.

The problem

Normally, if a borrower company becomes insolvent any net realisations from its “circulating” assets (which generally include inventory, debtors, and bank accounts) will be distributed firstly to employees for their wages and entitlements, then to secured creditors, and only then to ordinary unsecured creditors.

This means that a financier looking to provide new funding to a company, even if granted security, will normally rank behind employees and all existing secured creditors of that company.  This will often leave the new financier with too great a risk of non-payment to be able to provide funding, especially if the borrower is already in financial difficulty.

The opportunity – payroll funding

However, there is a way for financiers to jump to the head of the queue of creditors.  If a financier provides funding for the specific purpose of paying a borrower’s employees (pursuant to an appropriately-structured financing agreement), the financier will take over the priority of the employees paid using that funding.

This creates a mutually-beneficial opportunity.  The borrower can receive much-needed cash flow while the funder receives a right of repayment outranking not only ordinary unsecured creditors, but even outranking secured creditors to the extent of the company’s “circulating” assets.

Despite these benefits, payroll funding is still a largely untapped market in Australia, providing significant opportunities for financiers looking to expand their range of services, so long as they take care to obtain experienced legal advice regarding the structuring of their payroll funding agreements.

Stephen Polczynski, Managing Partner  Tel:  +61 (0)2 9234 1501     Email: spolczynski@plawyers.com.au

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