While Illinois’ backlog of unpaid bills is more than $6 billion, there is some relief for the state’s vendors. A private, for-profit startup company called Vendor Assistance Program LLC — created at the behest of state officials — is buying receivables through a state-sanctioned process.
The basic idea of paying cash today for a stream of income in the future, a process known as factoring, is not new. An individual or business in need of immediate cash can assign a receivable due in the future to a third party in return for a cash payment of somewhat less than the full amount due. The third-party investor profits by collecting the full amount when it becomes due.
“People from the governor’s office and CMS (Illinois Department of Central Management Services) approached us,” said VAP Chief Executive Officer David Reape. “What they wanted to do was figure out a way that we could put a program together to monetize the penalties that are associated with late payment. It was very important to the state that if a vendor did $10,000 worth of work they got paid $10,000. The state was aware that there were a number of factoring organizations out there that were offering vendors fairly steep discounts in order to get cash sooner; that there were vendors that weren’t able to bid on state business because of the delay in payment; and that there were vendors that were really struggling to stay in business because of the delays. We came up with the program and helped the state develop the terms. It’s a unique kind of program.”
A qualified purchaser, in accordance with the state-approved program, offers Illinois’ creditors 100 percent of the amount owed by the state for goods and services provided. The Illinois Prompt Payment Act (30 ILCS 540) provides that the state must pay an additional 1 percent per month late fee on bills paid more than 90 days after they are due. By accepting assignment of receivables only after they are eligible for the late charge, qualified purchasers like VAP can afford to pay vendors the full face value of receivables. Ninety percent of the amount is paid to the vendor within seven to 10 days of assignment, and the balance in two additional installments. The first installment is paid after the qualified purchaser receives the amount due on the invoice and the second is paid after the purchaser receives the late payment charge.
In order to participate in the program, a vendor must have a receivable that is eligible to accrue prompt payment penalty interest under the act. In addition, it must be at least 90 days past due and free of any liens or encumbrances.
A test case was online Security Systems LLC, which does business as Metro Enforcement, a Rockford company that provides security for Central Management Services at various sites around the state.
Scott Holland, the company’s chief financial officer, says Security Systems was particularly hard hit by the state’s late payments because the great bulk of their costs were labor and the firm paid its employees once a week. Central Management Services officials suggested the factoring program as a way to solve the problem. Holland says the company gave it a try and has been pleased with the results.
The program was slow to get rolling as the kinks had to be worked out, according to Reape, but now VAP has more than 600 vendors enrolled. In mid-August a second factoring company was approved by Central Management Services and the agency is seeking more vendors.
“CMS has met with more than 20 companies regarding the VPP (Vendor Payment Program, the generic program allowed under state law) and several have expressed interest in joining the program,” representative Anjali Julka said. “Deutsch Bank is now a qualified purchaser to enter the program.”
The VPP is entirely voluntary; participation is limited only by the available capital committed to the program by qualified purchasers. Reape estimates there are more than 2,000 qualified vendors that could be taking advantage of the program.
“It’s about education,” Reape said. “It’s contacting vendors of the state, explaining the program, explaining the benefits and risks, getting vendors to come to our website and register. Some people have said to us, ‘This sounds too good to be true.’”
As part of the registration, vendors need to execute an electronic consent form. It is sent directly to the state and it authorizes the state to send the qualified purchaser information on that vendor’s qualified receivables. The QP then receives weekly updates on what’s available for assignment from its registered vendors.
Reape stresses that it’s an entirely voluntary process for a vendor. Vendors decide whether to participate or not, and they can even pick and choose which receivables they want to assign.
“We have vendors that just participate during certain times of the year and other times don’t,” Reape said. “It’s a cash flow tool. This is very much about helping the little guys, but we have big vendors, too. They see the need and benefit. Vendors of all sizes see the value in this.”
Reape says VAP has acquired $192 million in receivables this year but has a very large line of credit with which to work. He adds that this innovative program is attracting attention from other states and even some municipalities — and he has had some discussions about expanding beyond the state of Illinois.
“I think we have a great and unique program here that really is a win-win for everybody involved.”