Factoring and existing bank credit relationships
Adding a factoring program when a business already has a bank line of credit or term loan requires reviewing how the two credit relationships interact through UCC filings, subordination, and cross-default clauses.
- A factor needs a first-priority UCC-1 on receivables. If a bank already has a blanket lien, that priority must be addressed before factoring can begin.
- A subordination agreement from the bank allows the factor to take priority in receivables without releasing the bank lien on other assets.
- Some bank agreements have cross-default clauses that can be triggered by a separate default in a factoring agreement.
- Review both the bank loan agreement and the proposed factoring agreement for notification requirements, cross-default language, and collateral descriptions before signing either.
A factoring company files a UCC-1 financing statement to perfect its security interest in the receivables it purchases. If a bank already has a UCC-1 on file covering the same receivables, a priority conflict exists.
Most banks with a blanket lien on business assets require either a subordination agreement or an amendment to their own UCC-1 to carve out receivables before a factor can take a senior position. Without that carve-out, the factor may not fund because it cannot establish first-priority rights in the receivables.
Some bank loan agreements also contain cross-default or notification clauses. A cross-default clause can make a technical default under the factoring agreement into a default under the bank loan. A notification clause may require the business to inform the bank before entering any new credit or factoring arrangement.
Subordination agreement
An agreement between two creditors in which one agrees to take a lower priority position in specified collateral. In factoring, a bank may subordinate its lien on receivables to allow the factor to hold first-priority rights, while retaining its lien on other business assets such as equipment and inventory.
Broad UCC collateral descriptions
A factor UCC-1 that describes collateral as all assets or all personal property rather than receivables only can conflict with an existing bank lien on equipment, inventory, or other non-receivable assets. Review the proposed UCC collateral description before signing the factoring agreement.
Steps to review when combining factoring with bank credit
- Search UCC filings for existing liens on your business receivables before applying to a factor.
- Read the bank loan agreement for any notification requirement before entering new credit arrangements.
- Identify any cross-default clause in the bank agreement that could be triggered by a factoring default.
- Ask the factor what collateral description it will use in the UCC-1 filing.
- Determine whether a bank subordination agreement is required before the factor will fund.
- Confirm with the bank how long the subordination process takes so funding is not delayed.
Cross-default clauses
A cross-default clause in a bank loan agreement can make a default under any other credit agreement into a default under the bank loan. If a factoring chargeback or reserve dispute is characterized as a default under the factoring agreement, and the bank loan has a cross-default clause, the bank may have the right to accelerate the loan. Read both agreements before combining them.
Related reading
Sources
- Uniform Commercial Code Article 9 - Uniform Law Commission. Accessed 2026-05-19.
- UCC Filing Search Information - National Association of Secretaries of State. Accessed 2026-05-19.
- International Factoring Association - International Factoring Association. Accessed 2026-05-19.
- Secured Finance Network - Secured Finance Network. Accessed 2026-05-19.