FACTORING CONSTRUCTION RECEIVABLES

Abstract

The reality of the construction industry is that construction projects are financed by general contractors and their subcontractors and suppliers. As the general contractor and its subcontractors and suppliers are paid, the financing of the project shifts to the owner and its lender. However, during the payment cycles that can sometimes last much longer than anticipated, it’s the general contractor and its subcontractors and suppliers who have to make financial arrangements to pay for the improvements until contract payments are received.

Banks may carry some of the more financially virile companies until the contract payments are received. However, there is a segment of the industry where bank financing is not an option. Enter the factoring companies – a growing collection of businesses that purchase the receivables of other companies and individuals at a discounted price, thus providing financing to the company to pay for the construction work. As discussed below, this method of financing necessitates the participation in this transaction by the party obligated to pay the company who has sold its receivable. There is no distinction under the law between an invoice that has been assigned as part of a factoring arrangement and a security interest in an invoice or receivable as relates to notification of an assignment. When an invoice has been assigned, there is no question as to whom the payment is to be made (assignee) and the amount that is required to be paid to the assignee. To the contrary, a secured party will have to prove entitlement to the underlying debt before it can assert its rights to the receivable and it can only recover to the extent such debt exists. An unwary company or lawyer representing such a company will need to understand the law as it relates to the purchase or promise of receivables to avoid making costly mistakes.

1. Introduction
2. Factoring Agreements / Assignment of Accounts
3. Rules Governing Assignments Under the UCC (Texas Business and Commerce Code)
1. Effect of Notice of Assignment
2. Adequacy of Notice
3. Contractual Restrictions on Assignment
4. Rights and Obligations of Assignees
1. Scope of Assignment
2. Enforceability of Arbitration Clauses
3. Assignee’s Rights to Liens and Payment Bond Claims
5. Trust Fund Issues
1. Construction Trust Fund Act
2. Rights of Trust Fund Beneficiary Versus Factoring Company
3. Rights of Trust Fund Beneficiary Versus Loan Creditor
4. Factoring Companies as “Other Lenders”
6. Protection Under Texas Property Code § 53.151
7. Conclusion

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