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Get Cracking on 2013: Factoring Possibilities with an Existing Lien Holder in Place

January 2, 2013

As the New Year kicks off, small business owners that are pulling out of a tough 2012 become re-energized to make 2013 their best year ever.

Is this you? Are you planning for growth and starting with optimism?

Among your alternative scenarios for 2013 — staying steady, growing moderately, or aggressively building out the business — this last option, aggressively moving ahead, may not be pragmatic if working capital is scarce.

a senior lien holder shakes the hand of a small business gaining accounts receivable financing
Do you aim to grow more sharply this year? Consider structuring an intercreditor agreement with your bankers, to access funds from a factoring firm.

For aggressive growth in 2013, consider the possibility that your small business might negotiate with a factoring firm and your existing lending relationships to carve out an intercreditor agreement, gain additional operational funds and get on a much-improved track.

Don’t fall into the trap of thinking that because current creditors have claims on your assets, you can’t access other funding sources.

Indeed, under certain circumstances, you can obtain accounts receivable financing even with your existing banking relationships.

Banks typically lend to small businesses and as part of their secured lending agreement, they make claims on certain assets of the business. This claim or “lien” against assets can be written in broad brush strokes, or it can carve out a specific subset of assets. For example, lenders can ask for security in the form of first rights to equipment, real estate properties of the business, or its tangible and intangible assets.

Lenders analyze a business and set out their legal claims to be senior lien holder with first lien rights on certain properties, within the framework of the uniform commercial code (UCC).

However, under certain conditions, banks may be willing to give up their first claim on the sliver of assets which are the accounts receivable of a business, to enable their borrowers to get accounts receivable financing. This would allow the merchant more leeway to operate, and acting more strategically can prove more profitable in the long-run.

In other words, senior lien holders are willing (if they are not shortsighted) to subordinate their lien rights on accounts receivables;  this enables their client (the small business) to grow and thrive and be in a better position long-term to fulfill ALL their obligations.  Lots of senior lien holders recognize that if they refuse to subordinate, they are effectively choking off the growth of their loanee, reducing the likelihood of that debtor to ever be in a healthy position to make good on their original obligation.

A senior lender will not only strengthen their loanee by carving out an intercreditor agreement and helping them gain working capital, they are ensuring the sustainability of their own business relationships by doing this.

Its a win-win for all, and in that spirit, we toast your kick off to 2013 with gusto! If you seek a creative solution to your small business’s financing needs, don’t overlook factoring possibilities with an existing lien holder in place.

Photo courtesy of Creative Commons 2.0, Office of Governor Patrick.

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