What You Need to Know About Subordination Agreements. When a lender has a UCC first lien position what do you do if your business needs more money ?

When a lender has a first lien interest in all of your business assets that means no other lenders can loan your company money on a secured basis. Most often, the first secured lender to your business will file a blanket UCC-1financing statement. That means that all your assets including contract rights and cash are collateral to the loan.

One major exception to this practice is if a leasing company or other lender is lending money so you can buy a single piece of equipment, software, or other single item. Such items are usually serial numbered (such as a tractor). In those cases the financing source for the piece of equipment only files a lien against the specific piece of equipment you are buying.

Another exception could be that your Merchant Cash Advance Company did not file a UCC lien. Sometimes the MCA company is afraid that by filing other competitors will see the filing and try to offer competitive bids. Many times it makes sense to complete the application and your new funding institution will inform you of all your UCC liens on your company, for free.

 Let’s suppose that you have a 5 year term loan, Business Revolving Line Of Credit (BRLOC), or a Merchant Cash Advance (MCA) that is secured by all your company’s assets. No new lender can make a secured loan until the first lender subordinates their interest in a particular class of collateral.

 A subordination is a process where the second lender/funder asks the first lender/funding institution if they will “let go” of a particular class of collateral. The most common subordination agreements take place with accounts receivable and inventory. These are current assets that can be used to secure a working capital line of credit. Should the first lender agree to the subordination, they either assign their interest in the subordinated collateral to the second lender, or terminate their interest on the specific assets that are subordinating.

 Subordination is the most common way lenders work with each other to allow multiple types of loans. One loan is normally determined by historical financials or bank statements and does not give enough capital to their client to fund the current growth spike. The second loan (“factoring house”) is a credit facility that is not determined by debt to equity ratios or historical financials, but by the debtors credit worthiness. The second lender is willing to extend as much credit as is needed to allow their client to take on additional business/clients (depending on credit evaluation of debtor). Once the lender/funding institution has subordinated their interest in the requested collateral, the second lender/ funding institution then files a UCC-1 financing statement showing they are in the first lien position on that class of collateral.

 The normal way this is worded is the first lender has first lien rights on those assets it has agreed to keep and second lien rights on the assets it has “given” to the second lender. The second lender has first lien rights on the assets that have been “given up” by the first lender. The second lender often has second lien rights on the remainder of the collateral.

 In either case, the borrower is benefited by getting access to additional credit with the two lenders working together to assist the borrower.

With Merchant Cash Advance companies normally you need to get past the broker and sales person and talk to legal department of that Company. It’s best to get the name, title and email address of the person in charge of making these decisions and forward a written email request. On the top of the letter you should put the name of your company, tax id #, contact information, loan number, UCC number, current balance, and amount of the original loan w/date the agreement was signed. In the body of the email make sure you put down the reason for the request i.e., I have gotten new purchase orders, hired new sales people, etc. Try to include projects, projections, details about new clients and dollar amounts etc. It may be advisable to give an incentive to the MCA company for example I will pay the next month of charges up front. Be sure to CC your salesperson & broker and second lender representative. Be sure to attach your MCA contract to your formal email request. Once you’ve sent the email requesting the subornation follow up with the proper person. Make sure you forward all contact information about your second lender:

1.   Lender Name: 

2.   Lender Address: 1

3.   Lender Authorized Signee and Title:

4.   Proposed Lien Amount: Aim High on this, we cannot fund over this amount.

5.   Lender Contact: Angela Fiorentino, Esq. (in-house counsel)

6.   Lender Contact Email:

7.   Lender Contact Phone:

8.   Lender Mailing Address: 

For Bank loans you need to include in your request more information:

·     Financials (Balance sheet & Income Statement)

·     Last Business Tax Return

·     Break down of the reason for the request (make sure you are specific about each project).

·     Projections

·     Name of debtors and address

·     Account Receivable Aging Report

·     Last Bank Statement

·     Give the bank an incentive i.e. Will pay off 50% of the loan with proceeds from my first funding.