AFA Successful in Obtaining Revamped SBA Subordination Agreement

The American Factoring Association recently secured a major win for the factoring industry by obtaining a revamped subordination agreement from the U.S. Small Business Administration. Here’s a look at some of the key changes and what factors need to know.  

Over the last several months, the American Factoring Association has worked closely with the U.S. Small Business Administration on a new form of standardized subordination agreement to address several concerns that made the existing standardized subordination agreement unworkable from the factoring industry’s perspective.

The AFA made this issue a top priority and by working closely with its government relations attorneys, provided a revised form agreement to the SBA for its consideration along with an overview of why the requested changes are needed. Recently, the SBA approved the new standardized subordination agreement and made numerous key changes as requested by the AFA. The form of the new standardized agreements can be found on the AFA’s website, but let’s look at some of the key changes the SBA approved and included in the revised agreement:                  

Firstly, the SBA’s previous form only subordinated the SBA’s lien with respect to accounts receivable and invoices. The AFA requested that this be modified to also include inventory, general intangibles and the proceeds thereof relating to such accounts receivable.    

The AFA also requested adding language clarifying that the SBA will subordinate in favor of factors a first priority ownership interest in accounts that factors purchase, as well as a first priority security interest in the subordinated collateral (i.e., the relevant accounts, inventory and general intangibles). This is needed to properly secure the monetary and non-monetary obligations owed by a client to a factor under a factoring arrangement.

Additionally, the SBA’s previous form required a factor to provide the SBA with at least 30 days written notice before taking any action due to a default by a client under a factoring arrangement (including any foreclosure action). The AFA requested language be included making clear that factors may continue exercising their rights to collect accounts after an event of default and apply proceeds thereof to satisfy a client’s obligations under the factoring arrangement and also make clear that a factor does not have to wait 30 days to exercise its rights in subordinated collateral if it reasonably believes such a delay is likely to decrease the value of the subordinated collateral or otherwise impair its ability to collect the subordinated collateral.

The SBA’s previous form also excluded subordination as to default charges, and the AFA requested that this be deleted. In addition, the AFA requested the agreement make clear that a subordination agreement does not terminate until a factoring facility is terminated and all amounts owed to the factor have been paid.

All the changes requested by the AFA listed above are reflected in the SBA’s revised standardized subordination agreement. This is a significant victory for the factoring industry and would not have been possible without the financial support of AFA members.

To educate factors about this important victory and what else the AFA is working on to bring about positive changes for the industry in Washington D.C., the AFA will be holding a member update webinar on June 13 at 11 a.m. PST. You can register for this free Zoom webinar here. The event will include a discussion of the accommodations agreed to by the SBA in favor of factors as well as a Q&A session.

If you’d like to support the AFA’s advocacy and education efforts, you can donate here. Payments to the AFA are not deductible as a charitable contribution for federal income tax purposes but may be partially deductible as a business expense due to the AFA's lobbying activities on behalf of its members.