Maintaining a healthy cash flow is the lifeblood of any business. However, slow-paying customers can create a significant cash flow crunch, hindering your ability to meet immediate financial obligations and invest in growth opportunities. This is where invoice factoring comes in. Invoice factoring allows businesses to sell their unpaid invoices to a factoring company in exchange for immediate cash, minus a fee. While traditional factoring offers a solution, some businesses may find themselves in a situation where they already have existing debt with a bank or another lender who holds a lien on their accounts receivable. This can make it challenging to secure traditional factoring. 

Here’s where second-position factoring emerges as a game-changer.  

What is Second-Position Factoring? 

Second-position factoring is a type of invoice factoring that allows businesses to access working capital even if they already have an existing lien on their accounts receivable. Unlike traditional factoring where the factoring company takes a first lien on your receivables, second-position factoring takes a subordinate, or “second,” position behind the existing lender’s lien. In simpler terms, the first lienholder gets paid first, and then any remaining funds from the customer’s payment are applied towards the factoring company’s advance and fees. 

How Does Second-Position Factoring Work? 

The process for second-position factoring typically follows these steps: 

Application

The business applies for second-position factoring with a factoring company. They will provide the factoring company with their financial statements, customer information, and a sample of invoices. 

Evaluation 

The factoring company assesses the business’s financials, customer creditworthiness, and the overall risk associated with the invoices. 

Approval

Upon approval, the business submits approved invoices to the factoring company. 

Advance

The factoring company advances a percentage of the invoice value, typically ranging from 70% to 90%. 

Customer Payment

The business customer makes their payment for the invoice directly to a designated account controlled by the factoring company. 

Settlement

The factoring company deducts its fees from the customer’s payment and remits the remaining balance to the business. 

First Lien Priority

Once the original lender (who holds the first lien) is paid in full, any remaining funds from the customer’s payment go to the business. 

Benefits of Second-Position Factoring 

Second-position factoring offers several advantages for businesses struggling with cash flow issues, even with existing debt: 

Access to Working Capital  

Unlike traditional factoring, second-position factoring allows businesses to access much-needed working capital even if they already have a lien on their receivables. This can be crucial for businesses that rely on slow-paying customers but have existing loans or lines of credit. 

Faster Funding 

Compared to traditional bank loans or other financing options, second-position factoring typically offers faster access to cash. This allows businesses to bridge cash flow gaps and meet immediate financial obligations without delays. 

Improved Cash Flow Management  

By converting outstanding invoices into immediate cash, second-position factoring helps businesses improve their overall cash flow management. This enables them to invest in growth opportunities, manage inventory more effectively, and meet payroll obligations on time. 

Reduced Risk of Bad Debt 

Since the first lienholder is paid first, second-position factoring mitigates some of the risk associated with customer defaults. Even if a customer fails to pay, the factoring company will likely still receive its payment from the first lienholder. 

Conclusion 

Second-position factoring provides a valuable tool for businesses seeking to unlock working capital and gain greater control over their cash flow. It offers a flexible financing option for businesses with existing debt, allowing them to access immediate funds without jeopardizing their existing lending relationships. 

CapFlow Funding can help you navigate the second-position factoring process and unlock the potential of this financing solution for your business. Contact us today to learn more about how we can help you achieve your financial goals!