Factoring Companies Guidebook
Maintenance
Definition
This is where a product is sold with the benefits of on-going support (maintenance) for a period of time. Usually maintenance contracts seen by factors tend to be 12 month periods, but they can range from weeks to a number of years and the may not be limited by time, but by the expiry of the cumulative utilisation of units of support purchased.
Concerns
Maintenance contracts/agreements may take various forms including:
Onsite service support for the product over a fixed period of time, provided by the Client.
Help-line support possibly provided by the Client or by the original manufacturer. The latter is likely to be an integral part of the product sale e.g. computer software. It is unlikely to result in any potential liability for the Client where they merely act as distributors.
The purchase of 'credits' from the Client, which entitles the customer to a defined amount of assistance. This can be expressed in hours or units of support and once that number of units has been used, the support expires.
Support being sub-contracted by the Client with or without the Customers knowledge
The sale of what amounts to an insurance policy for non-performance of the product. Dependant upon the nature of the maintenance, the concern for the Discounter is that in the event of the demise of the Client, there will be unexpired maintenance agreements, which would normally have been paid for in advance. This could result in the debtor attempting to offset the unexpired portion against other valid assigned debts.
Where maintenance is involved there may also be other contractual obligations, which due to their non-fulfillment, may give rise to claims for "liquidated damages", thus increasing the size of the claim and the potential offset.
Identification
Review the Client's invoices for any indications of maintenance or support, as well as their terms and conditions. Make enquiries of the Client as to whether they offer/sell such support and the value of any accrual they may hold in their Management Accounts for the potential liability in respect of pre-paid unexpired maintenance.
Treatment
Where such arrangements are billed retrospectively for services provided in an elapsed period, the debt will generally be funded. Where billings are in advance, involving services in future period, we will not fund the invoices.
All maintenance invoices should either be excluded from our Agreement or not funded. If assigned, a reserve should be created based on the value of the accrual held in the Client's Management Accounts, once we have satisfied ourselves as to its accuracy. It is not sufficient normally to simply disapprove the outstanding maintenance invoices on the ledger, as there remains a potential liability for those that have been paid and therefore removed from the ledger (a contingent liability).
