Subordination
An agreement where one creditor agrees to rank below another.
Why it matters
If another lender holds a senior UCC lien on receivables, the factor may require a subordination agreement before funding. Without it, the factor would fund receivables already pledged to another creditor, creating a priority dispute when customers pay. A subordination agreement changes the enforcement priority: the subordinating creditor agrees not to collect or foreclose on the receivables until the factor obligations are satisfied. The negotiation of subordination agreements between a factor and an existing bank can take days or weeks, delaying the start of factoring.
How it appears in contracts
Subordination agreements arise when the seller has an existing bank line of credit secured by receivables. The bank UCC-1 filing typically creates a blanket lien covering all accounts receivable. The factor needs either a UCC termination from the bank or a signed subordination agreement limiting the bank rights against receivable collections. Some bank credit agreements contain cross-default provisions: granting subordination without bank consent may trigger a default under the bank line, which the seller should confirm before agreeing to any subordination request from the factor.
Related terms
Related reading
Sources
- International Factoring Association - International Factoring Association. Accessed 2026-05-19.
- Secured Finance Network - Secured Finance Network. Accessed 2026-05-19.