There are situations where a company comes to a factoring company and has an existing bank loan. For various reasons the company is suffering from poor cash flow and is seeking relief from another finance company. The bank in this case would be the senior lender and would have a secured position on the borrower’s assets. A UCC-1 would have been filed at the State level which acts as notification to any other lender the collateral is secured.
Now the company needs more working capital and contacts us for factoring. One of the first searches we would do is on the UCC filings. Since we see that the bank has already secured the collateral the only next step is to contact and try and work with the bank.
The two choices would be pay off the existing note or negotiate a carve-out of the company receivables base. This means the factoring company could finance some of the invoicing as a way to provide badly needed cash flow to the struggling company. This scenario is completely legal but the possibility of achieving this result rests completely with the culture of the bank. Some banks are more inclined to protect their loan by assisting the struggling company in getting through a tough patch. But the greater majority of banks don’t have much incentive to let this arrangement go forward.
The method of setting up this relationship is through an inter-creditor agreement. These must be negotiated through the legal departments of the bank and the factoring company. It can take time, so this isn’t a quick fix for it is a complex problem.