Factoring and Another Lender

Can That Relationship Exist?

Factors are very conscious of other lenders to their client and how the security interest is achieved for these loans. The question always arises as to the possibility of having a factoring relationship and also maintaining financial relationships with other lenders. Clearly there is an answer.

There are many lenders that clearly fit in with a client that has a factor purchasing his/her receivables. The most obvious and simplest one is a lessor. If a lessor is filed first (UCC-1), the factor can easily work out a subordination of the receivables which in MOST cases the lessor does not secure. However if A/R is part of the collateral pool, getting the A/R released will not be a problem with most lessors. Also lessors will file with the phrase “and proceeds thereof” indicating not the A/R proceeds but the proceeds of the sale of the equipment if the lessee actually sells the equipment.

A traditional business asset based loan or line of credit can exist with a factor in place only if the collateral pool is sizable enough to allow for the A/R to be excluded from the lender’s security yet still providing ample collateral for the loan. This is very rare in healthcare as most healthcare providers can only provide A/R as the only collateral (other equipment or assets are usually leased and have no equity as collateral). None the less, “carve out” strategies are done all the time with multiple lenders as long as each feels secure regarding their particular loan or factoring facility. Anecdotally, if a bank is the other lender (as opposed to a non-bank lender like an ABL lender), the possibility of getting the A/R cut out of the collateral mix is going to be hard. The bank lending formulas which are federally monitored will include this component and regulators will not accept subordinating or releasing this part of the collateral. In many cases, assuming enough eligible receivables, the bank’s position (the loan balance plus interest accrued) can be bought out and the security interest held by the bank will then be released in favor of the factor.

To summarize, an existing loan does not necessarily preclude a factoring relationship as well. Lenders and factors can work together to reach a mutually comfortable security positon and provide to their client the best of both worlds.