How & When to Use the 2 Types of Subordination Agreements
You have received signed documentation from your client, the completed Notification from their customer just popped up in your email, you’re almost done! All you have to do is verify their UCC filings and you will be ready to go…Uh Oh…There is a UCC certificate that lists all of their assets as pledged to…Oh, no, not that, not THE BANK!
It is getting increasingly rare to fund clients without a Subordination Agreement being signed. In most cases, your client will have a loan or line of credit with their bank or financial institution. Which in turn means they will have a UCC filed pledging their assets, including receivables. A Subordination agreement will allow you to fund your client while they retain their relationship with their financial institution.
There are 2 types of Subordination Agreements: 1. The Standard Subordination Agreement and 2. The Revolving Subordination Agreement*. In most instances, you should use the Revolving Subordination Agreement or the RSA. The RSA is preferable because it allows you to finance your client on a continual basis whenever he/she needs financing. The RSA will usually work well when dealing with a supplier, an alternative financial institution or a community bank.
Recently, some national and international banks and financial institutions have been unwilling to sign the RSA. In these cases, you may use the Standard Subordination Agreement or SSA with the Offer to Sell attached. The SSA only allows you to finance the specific invoices listed in the Offer to Sell and cannot be used for future transactions. This means that every time your client needs funding you will need to get a new Standard Subordination signed by the bank or financial institution.
In either case, you need to have a conversation with your client and explain the Subordination Agreement so that they can explain it to their lender or supplier. A good rule of thumb is to offer the Revolving Subordination Agreement first. The Standard Subordination Agreement should ONLY be proposed if the lender and/or supplier refuses to sign the RSA.
Related Topics…Coming Soon:
-When a Subordination is needed: Amendments and Terminations
-How to Explain the Subordination Agreement
Sabeen:
It is also important to point that when you have to use Single Subordination you have to try to take double invoices with 50% of advance so you can create recourse base inside your single transaction. It is not always possible but this would be the next option after Revolving Subordination in single invoice factoring service.
One situation I have experienced is that the client wants to resolve the subordination issue first, before going through the effort of filling out our application and sending financials. They don’t want to go through the effort of our process if it will die when having the discussion with the bank.
I agree with Joe T. I have prospects who would like to do some invoice factoring but want to find out from the bank whether the subordination will be granted.
But I think it puts the bank in a “hotter” seat if our client can present all the paperwork and show how his business will survive/prosper if the bank helps out.
It would be very difficult to resolve client situation with subordination before client submit application and financials for factoring. You can’t resolve subordination issue before you understand how you can structure the transaction and subordination. We need to convince clients to send us financials first and then we might have a chance to find the answer to subordination issue.
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