When their bank and several other funders turned them down, a growing clothing manufacturer in New England was referred to us. We worked out an alliance with their bank that allowed us to complement the existing bank loan and credit line, enabling this company continued growth. Why is this an important success story?
First off: If you know of a situation such as the above please share it via a blog with others as we would truly like to make this information readily available to all!
That said: When a bank lends money to a business it most always files a UCC1 on all of the assets of the company. A UCC1 (Uniform Commercial Code) is the same as a mortgage company placing a lien on a house when the mortgage company provides a mortgage. This action ‘secures’ the business assets for a lender or funder as their collateral and can be done as an all asset lien and/or it can segregate the assets such as when a leasing company files a UCC1 only on the piece of equipment it sets the lease up for; or when a factoring company files a lien only on the accounts receivables; and/or when an inventory financier would file a UCC1 only on the inventory.
When a lender, such as a bank, loans money most always the loan maximizes the amount of money the bank is willing to make available based on the value of the company assets and/or personal assets and cash flow (i.e. the company or personal assets become the bank’s collateral). So, if the bank allows another funder to be involved, this dilutes or reduces the bank’s ability to recover its investment creating a potential risk for the bank.
If two funders/lenders work together, as in the above action, this creates what is called an ‘inter creditor agreement’. When the bank allows this to happen, it is giving up some collateral to gain some collateral (more sales – more accounts receivables – more cash flow). This is a commendable action on the part of the bank.
In this case, the clothing manufacturer was going to increase their sales. So, the collateral (mostly the accounts receivable) would increase. The bank we had the privilege of working with had enough foresight to understand that allowing us to increase the ability of the client to cash flow and enabling the client to grow, would actually put the bank in a better position.
Of note: With all due respect for these situations, it’s very generous for a bank to restructure a loan to facilitate an inter creditor agreement as there are expenses associated with doing this. For instance, involving their legal departments and credit committees all of which need to be understood by a borrower.
That said: If you have any questions feel free to contact me at ebrown@finance-manager.com and always remember that we’d love to hear your feedback in our blogs!