One of the first questions we ask someone who wants to use factoring is, “do you currently have a bank loan?” Most of the time it’s no, and there should be no impediments to setting up an invoice financing facility. But if the answer is yes, then we have to ask, “what is the bank loan secured by?”
If you read one of our our previous posts, you know all about the UCC-1 or Uniform Commercial Code. You cannot have a bank loan and also use factoring on the side. It doesn’t work like that. The factoring company must have first security position on the accounts receivable it is purchasing and making advances on. Working out an arrangement with the previous secured lender is called an INTERCREDITOR AGREEMENT. It allows both secured parties to isolate parts of the assets to hold as collateral. For example, let’s say you owed the bank $250,000 and had other assets of equipment, inventory, and real estate. And you usually have between $200K – $300K of accounts receivable. An agreement can be created where the factoring company has first position on the $0 – $100K of A/R and the bank would have first position on all A/R above the initial $100,000. This would give you a chunk of A/R to work with to improve your cash flow needs.
The trick is to carve out a deal that all parties feel comfortable with. Bear in mind, the success of this transaction has everything to do with your payment history with the current lender. If you miss payments to the bank they will be less likely to work with you to increase your financing position. So pay your creditors on time it’s worth money in the long run.