A common scenario today in business is having a low credit line from your bank. Lets say you have a $50,000 dollar line of credit with your bank. You have a long-standing, excellent relationship with your bank but in today’s economy it is simply just not enough. Your credit line is maxed out and the true need of your business is financing of $200,000 or $300,000 dollars to keep your business growing. What can you do in this situation? Your business has good credit, the orders are coming in and you are growing at a steady pace. The only way to take your business to the next level is to secure that much larger line of credit. What is the solution?
Your business can leverage against your receivables through invoice factoring or purchase order financing through a factoring company. An experienced factor can work directly with your bank on a subordination agreement allowing you to leverage receivables financing to get the working capital you need to grow your business.
First, what is bank subordination?
A subordination is when a 2nd lender, in this case the factor, asks the 1st lender, the bank, if they will allow the business to take on an additional lender. Bank subordination agreements are commonly done when leveraging accounts receivable and purchase orders. The accounts receivable or PO’s are assets that are used to secure a working capital line of credit. One of the most common ways lenders will work with each other is through subordination. Allowing the business to take on both a traditional line of credit and a factoring line of credit.
A factoring company can work with your bank and create a bank subordination agreement where their $50,000 dollars is covered by other assets and then a factor can fund against your accounts receivables or purchase orders up to 95%. This allows the business to take on larger jobs, fund payroll each week and pay for other expenses. The key is working with a factoring company that has existing relationships with banks and has the experience necessary to compete the transaction.
Factors are often able to finance your business when a bank will turn you down. Your bank needs to keep the depository relationship. Factors do not concern themselves with this because they are not a bank. Factors simply buy your existing accounts receivables or purchase orders in order for that business to obtain immediate cash payment of the accounts. They just want to get your the critical cash your company needs to grow your business.