Factor brokers and independent sales organizations (ISOs), did you know your clients with outstanding Small Business Administration (SBA) loans can still qualify for funding with a factoring company? Don’t let a SBA loan prevent you from pursuing invoice factoring and PO financing opportunities with clients that need to increase their working capital funding.
In this article we’ll discuss SBA loans, and how factoring companies (factors) work with SBA lenders that have first (senior) lien positions on assets, to qualify your clients for working capital funding.
What Is an SBA Loan?
With the arrival of stimulus programs including CARES Act and the Paycheck Protection Program (PPP), government-backed loans have become extremely popular for businesses over the past couple years. These loans are commonly known as “SBA loans” and are business loans guaranteed in part by the Small Business Administration, an agency of the Federal Government. SBA loans are designed to help small businesses obtain the financing they need to weather adverse business events, such as the pandemic, as well as for growth as their business expands. Since the onset of the pandemic, the volume of SBA 7 (a) loans, the most commonly used SBA loan, has risen dramatically from $22.5 billion issued in the fiscal year ended July 31, 2021, to $36.5 billion in the fiscal year 2022.
Features of SBA Loans
The SBA does not make loans directly. Instead, it works with lenders that process loan applications and issue loans. The SBA guarantees 50-85% of the loan amount.
The SBA sets the maximum interest that may be charged on an SBA loan. The rate charged by lenders is lower than it would otherwise be for a similar loan because of the SBA guarantee. SBA loans are easier to obtain than regular business loans due to the government guarantee.
SBA loans offer longer repayment terms than regular business loans, which makes it easier for small businesses to manage the cash flow needed to make loan payments.
SBA lenders must take a first lien position on the assets financed with loan proceeds, and typically a lien on all other assets of the company including but not limited to inventory, accounts receivable, equipment, general intangibles, real estate, etc.
Types of SBA Loans
There are a number of SBA loan options to fit a wide range of business needs ranging from export and disaster loans to loans for working capital, furniture, equipment, real estate, and business expansion.
The most commonly used loan is the SBA 7 (a) Loan. The proceeds can be used for just about any business need – working capital, furniture, equipment, and business expansion. The maximum loan amount is $5.0 million with repayment terms up to 25 years depending on the use of the proceeds. Standard 7 (a) loans can take a number of weeks to process.
For faster processing, there are SBA Express Loans with a maximum loan amount of $500,000 and 7 (a) Small Loans with limits up to $350,000.
How Factoring Companies Work with Lenders that Have First Lien Positions
SBA loans can be a good source of capital, but like any loans they don’t always provide all the working capital a company needs to grow. Invoice factoring and purchase order (PO) financing can provide the working capital financing clients need for growth. Experienced factors can help clients with SBA loans by working with their lenders to obtain the first lien positions needed to approve working capital financing programs.
How a Subordination Agreement Is Used to Obtain the Lien Position a Factor Needs
When a client has an SBA loan, the lender will usually have a first lien position on accounts receivable, inventory, and all other assets. This can be problematic because a factoring company needs to have a first lien position on general intangibles, accounts receivable and inventory to approve a prospective client. In order to resolve this situation, a factor must negotiate a subordination agreement with the SBA lender.
A Subordination Agreement is handled with an Intercreditor Agreement between the SBA lender and a factoring company. The SBA lender agrees that the factor can have a first lien position in certain assets. The SBA lender subordinates its lien position to the factor and takes a secondary lien position. Subordination gives the factoring company the security it needs to fund a client’s accounts receivable and possibly finance its purchase orders.
The challenge for the client is to convince the SBA lender to give up its first lien position. The factoring company, who is working with the prospective client, needs to convince the lender that subordinating its first lien position to the factor can provide the necessary working capital which will benefit the client, and make the SBA lender’s position on the other assets more secure.
In some cases, a factor may need to agree to limit the subordination of an accounts receivable lien to a maximum dollar amount or to certain accounts. This makes the SBA lender security interest subordinate to the factor’s security interest, but only up to the amount of the cap or in specific named accounts receivable.
SBA lenders may also not be willing to give up their first lien position in the client’s inventory. In some cases, the factor may need to negotiate a lien position that is limited to returned inventory related to factored accounts receivable only.
A Factor Company’s Experience in Negotiating with SBA Lenders Matters
Negotiating with SBA lenders requires experience and skill. It is important to work with a factor that has a track record of successfully negotiating with SBA lenders to obtain the proper Subordination Agreements needed for their clients.
When you have a client with a current SBA loan that needs additional working capital to grow their company, work with a factor that has the skills and experience needed to successfully negotiate a Subordination Agreement, so your client can obtain access to much-needed working capital.
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Capstone Corporate Funding, LLC specializes in providing working capital programs that can be custom-tailored to support a client’s business model. Capstone has a proven track record of working successfully with SBA lenders to obtain the Subordination Agreements needed to fund invoice factoring and PO financing programs for clients.
