An intercreditor agreement is a contract between two or more creditors of the same business that sets out who has priority over which assets. A subordination agreement is a related document in which one creditor agrees that its claim ranks behind another's.
How it works in factoring
Factors usually need first priority on the receivables they buy. When a UCC search shows an existing lien that covers receivables, such as a bank's blanket lien, an equipment lender's broad filing or a merchant cash advance provider's filing, the factor has a few options:
- Ask the existing creditor to release its lien on receivables entirely
- Ask the existing creditor to subordinate its claim on receivables to the factor
- Negotiate an intercreditor agreement carving up collateral, for example, receivables to the factor and equipment or real estate to the bank
The Uniform Commercial Code allows creditors to agree to change priority among themselves. Typical intercreditor terms cover which assets each party has first claim on, notice of defaults, standstill periods before one creditor can enforce, and how proceeds are shared.
What to check
- Your existing loan documents may prohibit selling receivables without the lender's consent
- Some creditors charge a fee or take time to sign; start early
- Make sure the agreement covers the specific collateral the factor needs
- Understand how the agreement affects your ability to refinance either creditor later
Without a clear priority arrangement, a factor may refuse to fund or may limit the advance.