What does a first position on my Accounts Receivables mean?

Generally a Factor will take a first position on all accounts receivables as collateral even if they are only purchasing certain accounts. This allows the Factor to purchase other accounts when there has been an offset to the receivables that can’t be covered by the reserve. This is preferable to invoking the personal guaranty and instead another invoice is purchased to offset the invoice that didn’t pay. It also gives greater flexibility to the client to choose and change the customers submitted for factoring.

When an invoice is purchased and funded it becomes the property of the Factor and is no longer available to leverage or sell. You wouldn’t sell the same car to two different people and the same applies to receivables.

When a bank is already in first position of the receivables which often will happen with an overdraft or corporate credit card, the Factor will need a postponement or subordination from the bank releasing their interest on the receivables. The other option is to pay off the outstanding balance to the bank and request a release on the assets.
In some circumstances banks will work with the Factor and split up the security to benefit the client. In this situation a portion of the receivables can be isolated for the purpose of increasing cash flow by factoring a particular account that is experiencing growth or identify an amount that will be factored. This reduces the amount of the security available to the Factor and increases the risk to finance but this can be very beneficial to the client who is growing rapidly.

Sometimes a Factor will take a General Security Agreement which secures all the assets of the company. Generally the first position on the receivables is required and sometimes inventory and then all the other assets will fall in line depending on who has previously registered. For example if there is equipment leased or financed and has a previous registration the GSA taken by the Factor will fall behind those lenders.

One of the benefits with factoring is the ability to separate out the assets of the company to take better advantage of leveraging those assets.