Lately there have been a fair amount of companies interested in invoice factoring who have an existing line of credit with a bank. It is very simple for a factoring company to find out about the outstanding loan, because of the UCC-1 financing statement previously filed with a state agency. A UCC search is one of the first items on a factoring companies list once they have received an application.
The UCC acts as a gatekeeper for all types of lenders who are considering an asset for collateral. It allows anyone to know whether the particular asset has been spoken for. Loan documents specifically reference the financing statement and make clear that attempts to liquidate assets under their control are ground for immediate default of the loan. In other words, if you sell invoices to a factoring company that are considered collateral for a bank loan, the chances are very good the bank will want 100% repayment of the loan the minute they find out. It’s unlikely a factor will enter into such a scenario. You can read more about the UCC, here.