Why Can’t I Combine Factoring with a Business Loan?

It’s very common for prospects, especially larger companies, to ask if factoring can be combined with other types of business financing – such a business loans, lines of credit, or equipment leasing arrangements.

These solutions can work together only if they are not claiming the same assets as collateral. This arrangement can be a problem because most business loans and lines of credit also claim your invoices as collateral.

The factoring perspective

Let’s look at a conventional factoring agreement. In most agreements, you agree to sell your invoice (or the rights to it) to a factoring company. But an invoice is just a piece of paper – how can the factoring company secure its position when you sell the invoice to them?

The factoring company secures its position by filing a UCC lien granting it first rights on the asset (in this case, the payment of the invoice). The lien also helps ensure that the same collateral is not sold to other companies at the same time.

In general, liens work by order of filing; so, whoever files first is in “first position” and has first rights. This point is important because factors need to be in first position for the invoices they buy.

The business loan perspective

With a business loan, the bank or business finance company files a lien. This lien commonly covers all your assets and tends to include accounts receivable. This approach ensures that the bank is in first position with respect to these assets. Why do banks include accounts receivable in their filing? Receivables are good assets and make great collateral with liquidity.

The problem

Consequently, a company with a business loan can’t usually get an invoice financing line. The factor won’t be able to get a first-position lien against accounts receivable in order to secure its collateral.

Is there a way around this problem?

The only solution is to ask the bank to subordinate its position against your receivables, enabling the factor to assume first position. This strategy may work if the bank is over-collateralized, but, in reality, it seldom works. Banking institutions need the accounts receivable collateral to ensure that their position is safe.