UCC-1 Filings & Subordinations

When a lender has a stake in something you own, they usually make it public. Think of it like when there’s a lien on your car title or a mortgage on your home. It’s basically their way of saying, “This asset is tied up—if it’s sold, we need to be paid first.” You’ll grant them the right to file a UCC-1 in the Loan or Security Agreement documents.

A UCC-1 filing works much like a lien or mortgage, but for businesses. It’s recorded with the Secretary of State in the state where the business was formed. Most factoring companies file a UCC-1 as soon as the relationship begins.

Why? Because in order to purchase your invoices, a factor usually needs to be in “first position” on those accounts. If other lenders already have UCC filings in place (think bank or SBA loan), the factor will need to negotiate into that first position before moving forward. It’s a necessity in order to legally sell the invoices.

Sometimes a business has multiple lenders, each with a claim on the same collateral. If those other creditors agree—or if there’s some financial arrangement—the parties can sign what’s called a Subordination Agreement. This simply means everyone agrees that the invoice factoring company gets the top spot, or “superior position,” on the accounts being purchased.

When a business has several lenders involved, things can get tricky. In some cases, a factoring company may agree to a “carve-out”—meaning other accounts are excluded from being factored. This usually happens when senior lenders don’t want to give up control of every account to the invoice factoring company.

When lenders work out a subordination agreement, it might not give the factor access to every account right away. That can limit how much funding you get upfront. But it’s usually just the first step. As trust builds between the lenders, more accounts can be freed up, which means more cash flow for your business.