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, more financial institutions have been willing 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, when performing invoice factoring transaction, you need to have a conversation with your client and explain the Subordination Agreement. Meeting jointly with the bank or a conference call can make it easier to obtain subordination.  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.

Sabeen Ahmed

The Interface Financial Group

The client needs to improve cash flow and wants it to happen immediately.IFG wants to help, but must collect some basic information prior to even suggesting the product that may be appropriate for the client.

The IFG representative will ask for general information about the clients business: location, name of company and caller, position, what does the company do, what are the names of a few major customers, approximate monthly revenue, payment terms offered, what is the money needed for, approximate total A/R and A/P, if they have loans or lines of credit and what is the security for those.

This basic data collection should be enough for the IFG representative to suggest whether invoice factoring is appropriate or if standard factoring would be better.The data may also suggest that IFG is not the solution to the client’s cash flow issue.Whatever the outcome of this first contact, at the least, rapport will have been established.

If it seems as though IFG can be a solution then the client will be requested to submit a simple one page application and some business financial information (Income Statement, Balance Sheet, A/R and A/P Summaries). The IFG representative will follow-up within hours to see if the client needs any help or has other issues.Once the application and financial information is received by IFG, the client’s file enters the Due Diligence process (due diligence refers to the care a reasonable person should take before entering in an agreement or transaction with another party). Usually IFG will respond to a client within 24 hours once the requested documentation is received.

Lorin M. Spak

The Interface Financial Group

Yes, it may seem simple in theory but in reality, due diligence is and should be a thorough and complete process. Due diligence is all about validating facts, eliminating assumptions and digging for more information about your clients and customers. Information is knowledge and you must know your clients.

Over the past several years, in general, there was a significant lapse in the due diligence process by many parties as the times were good and most expected it to get even better. That lapse, no doubt, contributed to the unwinding of the housing market, commercial real estate, the banking system and commercial and individual lending all of which contributed to the downturn in the economy. History tells us over and over again, do not deviate from the basics. If one does, the results may be catastrophic.

With origins in the private sector world of business and finance, the term “due diligence” refers to the process through which an investor or funder, researches an organization’s financial and organizational health in an investment decision.

The decision to fund or not to fund is based upon a balance of objective data analysis, insight into the general state of organizations or individuals health and stability, and intuition. A sound and thorough due diligence review is the process through which all the factors that make up that equation are uncovered and understood. It is a process in which one seeks the “truth” about an organization or individual.

When working with new and existing invoice factoring clients, never forget the basics and follow the due diligence process completely.

Jan J. Cunningham

The Interface Financial Group

There are several main questions that can help you not only obtain invoice factoring for your growing business but figure out how to use it to your advantage:

1.  How Much/What For? The more specific the better, how much is the capital requirement and for what exactly will the capital be utilized. All accompanying documentation is helpful, but this answer needs to be well thought out and defended in any discussions with invoice factors.

2.  Repayment? Again, what is the plan? After all is said and done how will the capital be repaid? What are the fall back positions? Best case/worst case? What recourse is involved? Where is the value of the proposition?

3.  Who Will Make It Happen? Certainly one of the most critical questions to be answered. Who has the previous experience to make the idea succeed? Is there a team, how well do they work together, how well do they know each other?

With a fully qualified explanation to these three questions, the road to understanding your business concept will be much easier. It will create the foundation that most factors are seeking to engage in further in depth negotiations.

There are 3 parts to the typical invoice factoring transaction. First is the “advance,” which is determined as the percentage of total invoiced dollar amount. The advance gets paid as soon as the invoice goes live and is verified as accepted by the customer. For example, if the invoice submitted is $10,000 and the advance rate is 80% then the advance will be the $8,000, usually bank wired into the clients’ company account.

Next is the rebate that is held back until the customer pays the invoice – directly to the factoring company. Again it is determined by the remaining portion of the invoice after the advance. Once the customer payment is received by the factor, the reserve is released to the client. Factoring companies handle the rebates differently, so be sure to understand what the offer specifies.

Lastly is the discount fee, this is the cost for funding the invoice. Some factoring companies handle this computation a little differently. But when the invoice gets paid, the discount fee is taken out of the reserve and the balance is sent on to the client, thus completing the transaction. With The Interface Financial Group, there is no second guessing involved. You pay a daily rate and will only pay for the amount of time the invoice is out. Most other factors will charge you for a flat number of days, whether your invoice is paid in 10 or 30 days, you would be paying the same amount, making your cost much higher.

Sabeen Ahmed

The Interface Financial Group