A factoring company frequently finds a situation where it may have to work in conjunction with a bank to provide working capital to a business borrower. In all cases where the bank has an existing loan in place they will have filed a required UCC-1 on the business assets since they are the collateral for the loan.
The financing statement on the accounts receivable bars the borrower from using the same receivables as a way to access more working capital. In unique situations where the borrower does require additional capital there is a posibility that arrangements can be made to accomondate the client. If they have been current on their loan payments and have additional assets, or are willing to make a substantial payoff on the outstanding loan balance, the bank and factoring company could negotiate an agreement.
This arrangement is called an “inter-creditor” agreement. It is set up between the two lenders for the purpose of bringing cash flow to the client. It essentially allows the factoring company’s position on the receivables to prime the bank. After the factoring company makes advances on creditworthy invoices, it can rest assured the collateral has been secured properly. Depending on the banks willingness to move forward with this arrangement, it can prove to be a life saver to a struggling company in need of additional capital.