How Bankers Factoring Works with SBA Lenders that Have First Lien Positions
How SBA Subordination Agreements Work with Bankers Factoring
Current Small Business Administration (SBA) Loan borrowers can qualify for business funding with Invoice Factoring. Many businesses took on Paycheck Protection Program (PPP) Loans during the COVID pandemic to provide cash flow for business expenses. Do not let your SBA Loan hinder your ability to secure cash flow financing.
Bankers Factoring works with clients and SBA lenders to secure working capital through SBA subordination agreements. Invoice factoring provides immediate cash funding to businesses needing payroll funding, sales growth, and to meet loan repayments.
What is an SBA Loan?
SBA Loans are business loans partially guaranteed by the federal government, helping relieve the credit risk for the lending financial institution. The SBA does not do the actual lending; instead, the SBA has a network of authorized banks and lenders. Financial institutions lending money to small businesses through SBA Loans offer advantageous terms with a partial government guarantee.
The partial government guarantee covers a fraction of the loan extended to the business. This protects the lender if you cannot pay your SBA loan back. A partial government guarantee can cover up to 85% of the loan, which offsets the risk profile of small businesses.
Small businesses typically do not qualify for traditional financing due to their lack of credit, financial history, and financial position. If a small business does qualify for conventional financing, the terms are stringent and not favorable for the client.
SBA Loan application and approval process are rigorous since the federal government backs the loans. Applying for an SBA Loan is a lengthy process that requires large amounts of paperwork and documentation.
How do SBA Loans work?
The SBA sets the maximum interest on SBA Loans which is lower than it would be for a similar loan. SBA Loans offer longer repayment terms than traditional loans, which helps reduce the cash flow burden. SBA Lenders take the first lien positions on business assets, including inventory, accounts receivable (AR), equipment, intangibles, and real estate property.
- Standard 7(a)
- 7(a) Small Loan
- 504 Loan
- SBA Express
- Export Express
- Export Working Capital
- International Trade
- Preferred Lenders
- Veterans Advantage
- Micro Loan
How do factoring companies work with first-position lenders?
SBA Loans help small businesses secure capital, but they have limitations in funding the cash required for growth. Invoice factoring financing provides working capital small businesses need for expansion efforts. Invoice factoring, also called AR factoring, requires the factoring company to have a first lien position for funding approval.
Bankers Factoring is experienced in working with SBA Loan clients and their lenders to secure the first lien position. This process is called subordination, an agreement ranking collateralized debts for purposes of repayment. Ranking collateralized debts determine the order of compensation from a debtor in foreclosure or bankruptcy.
Learn more about Bankers Factoring Tax Lien Solutions.
How a Subordination Agreement is Used In Invoice Factoring
A Subordination Agreement is used to obtain the lien position a factor needs. With SBA Loans, the lender has the first lien position on ARs and other business assets. This causes a problem for the factoring company as it requires a first position lien – this is where the subordination agreement with the SBA lender comes into place.
A subordination agreement is facilitated with an Intercreditor Agreement between Bankers Factoring and the SBA Lender. The subordination agreement establishes that the factoring company can have the first position over the SBA Lender. Essentially the SBA Lender subordinates or gives up its lien position to Bankers Factoring.
The main challenge in a subordination agreement is to convince the SBA Lender to move to a lower lien position. When working on behalf of prospective clients, Bankers Factoring coordinates the subordination agreement. We work to show how lien subordination would improve the financial position of the client and SBA Lender.
Demonstrating how the working capital from invoice factoring reduces the SBA Lender risk is necessary for a subordination agreement. In some cases, the factoring company may agree to limit the subordination to accounts receivable only. Limiting the subordination agreement to a specific dollar amount of ARs is also possible. In a limited subordination agreement, the SBA Lender’s interest is protected up to a cap or a particular asset class.
To learn more, visit our previous article, EIDL, SBA Loan & Tax Subordination Agreements with Bankers Factoring.
Bankers Factoring SBA Loan Subordination
Our experienced team of employee-owners has helped clients receive invoice factoring financing with SBA Loans. We understand the importance of showing the SBA Lender how invoice factoring will reduce its overall risk. Invoice factoring improves client cash flow which helps the SBA Lender receive their monthly principal and interest payments.
Invoice factoring is a tool that unleashes business growth through increased sales performance. Bankers Factoring demonstrates to SBA Lenders your business growth plans and how this further reduces their overall risk. The process of SBA Loan subordination is not complex at Bankers Factoring. We have arranged and funded a subordination agreement in 7 days.