The Small Business Administration & Factoring: A Perfect Match

If your company has obtained a loan backed by a Small Business Administration guaranty or a direct SBA loan, you more than likely were required to provide the lender with a “blanket lien” on your company’s assets. The term “blanket lien” is used because the lien covers all your company’s assets, including existing and future accounts receivable.

Many commercial borrowers fail to understand that simply because the loan proceeds are being used to purchase equipment or real estate, that doesn’t mean that the lender or the SBA won’t require you to pledge all your other business assets to further secure your obligation. It is very common for us to be approached by a company that recently took out an SBA loan they thought was secured only by the asset the loan proceeds were used to acquire. Not so.

Most commonly, we see prospective clients who have financed a specific piece of equipment, only to discover all their assets are encumbered by the finance company, the lender or the SBA. They have plenty of accounts receivable that we could immediately turn into cash— if not for the fact that the receivables are already tied up. That doesn’t necessarily mean the borrower won’t be able to obtain financing; it just means the borrower will have to approach the lender and/or the SBA to request a subordination of lien.

A subordination is simply an intercreditor agreement in which two or more secured parties agree to lien priorities among themselves. In most cases, the factoring company and the lender/SBA agree that the factoring company’s lien on the accounts receivable will be superior to that of the lender/SBA, while the lender/SBA’s security interest in the borrower’s other assets shall be superior to that of the factor. Obtaining a subordination agreement from the SBA is usually not difficult. If it’s determined to be in the lender/SBA’s best interest that the borrower finance its other assets elsewhere, and if the lender/SBA believes that enough equity exists in a borrower’s collateral, then the lender/SBA is typically willing to give up its rights in the excess collateral. Interstate Capital maintains the SBA’s standard subordination agreement in its files for quick access. It usually takes a few days for the lender/SBA to approve a subordination.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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