What Is a Bank Subordination Agreement?
Your line of credit has been maxed out, and you need $200,000 to $ 300,000 in working capital to keep the company growing. Your company has good credit, you are receiving new orders, and it continues to grow at a steady speed. The only way you have by which to take your company to another level is to get that much larger credit line. What would be your solution to this business situation?
One way is that you can leverage against accounts receivable through purchase order financing or invoice funding through a factor. An experienced factoring company can work with your US-based bank on a bank subordination agreement which allows you to leverage accounts receivable financing to secure the working capital amount you require to grow your company.
Bank subordination refers to an agreement where the second lender asks the first lender whether it will let you take on one more lender. In this case, the first lender is the bank, and the second lender is the factor. A subordination agreement is done usually when leveraging purchasing orders and accounts receivable. ARs and POs are assets used to get a working capital line of credit.