Intercreditor agreements with factors were always a significant obstacle in closing a purchase order financing deal.
For starters, there is a good deal of unfamiliarity with purchase order financiers – even concern – that the purchase order funder might be taking over the senior lender’s collateral position or may refinance the client away.
This, of course, is very far from the reality, as funders are only asking the senior lender to subordinate on the purchase orders and collateral created as a result of the purchase order financing, nothing more.
Purchase order funders typically prefer and benefit from factors advancing on the receivables in order to pay off the financing. The purchase order financier subordinates their security interest back to the senior lender or factor upon receipt of the advance on the newly created receivables. As these tandem deals are gaining popularity, the inter-creditor agreement has become a more widely accepted and effective tool.
Factors benefit greatly from increased financing volumes without venturing into uncharted waters.
Unlike an inter-creditor agreement or deed of priority used in the traditional lending market, purchase order financing transactions are driven with a clear start and finish.
It’s prudent for a factor or senior lender to recommend purchase order financing instead of providing an over-advance themselves (taking a risk on production without collateral/heading up the risk curve on AR). Lenders should always be looking to reduce inventory reliance in the borrowing base.
Usually, the over-advance or risk on production (performance risk either on clients factory, supplier or supply chain/cross-border risks) becomes soberingly obvious during a collect out.
For the client, relying on a form of transaction financing from a purchase order financier is often a desirable alternative to diluting equity to raise short term capital. Factors and traditional lenders can easily co-exist with purchase order funders with the inter-creditor agreement as a critical tool to a soundly structured supply chain deal.
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Stak provides working capital to clients that sell to some of the largest buyers in Australia & overseas.
