Monday, January 08, 2007

Factoring Question 7

If the company has an existing bank loan or is drawing on a bank line of credit, can its invoices still be factored?

That depends on the cooperation of the bank. Frequently a start-up, or an established growing company requires capital and will approach a bank (after getting initial capital from family or friends). Collateral for the bank loan may be by way of home equity, stocks or using a third party as Guarantor.

However, the bank usually assigns to itself the tangible assets of the business, as additional security. This covers the invoices, which are technically, commercial paper and therefore a business asset. The document by which the bank receives security over the invoices, is known as the UCC-1 Financing Statement.

If in future the business wishes to factor its invoices, it must disclose the UCC1-Financing Statement to the Factoring company. Since the bank now owns the Receivables, the Factoring company must obtain the bank’s approval to subordinate those Receivables, and thereby relinquish ownership.

Only when that is done and the Receivables assigned to the Factor, will factored funds be available.

Banks are generally open to subordinating, but it must be dealt with on a case by case basis. If the bank has concerns, then either factoring will not go ahead, or the business will first have to pay off the loan or make a significant payment towards its reduction.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

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