What is a Subordination Agreement Factoring – FactorFreight
Last Updated and Fact-Checked: July 2026
When multiple lenders have claims on your trucking company’s assets, things can get complicated. A subordination agreement is the legal mechanism used to establish who gets paid first.
In factoring, a subordination agreement is a legal document where one creditor (like a bank or equipment lender) agrees to rank behind the factoring company in priority for claiming your accounts receivable as collateral.
Overview
Factoring companies demand first priority on your invoices. They enforce this by filing a UCC-1 lien. However, if you already have a business loan, that bank likely has a blanket lien covering all your assets, including receivables. Understanding what is a subordination agreement factoring is crucial because the factoring company will not fund you unless the bank signs an agreement “subordinating” their rights to the receivables to the factor.
Practitioner Note: “In my experience reviewing hundreds of factoring setups, subordination agreements are the biggest bottleneck for established carriers. Banks are notoriously slow to sign them, which can delay your first factoring advance by weeks.”
Key Factors to Consider
Priority of Liens
Without a subordination agreement, whoever filed their UCC lien first has the primary claim. Factoring companies will not accept second position on accounts receivable.
The Bank’s Perspective
Banks are hesitant to give up collateral. However, they usually agree to subordinate the receivables because they know you need factoring to maintain cash flow and pay back your bank loan.
Equipment Financing
If a factoring company files a blanket lien on your business, you might need them to sign a subordination agreement later when you try to finance a new truck. See what is a UCC filing in trucking factoring.
Step-by-Step Process
- The Conflict: You apply for factoring, but the factor discovers an existing UCC lien from a bank or SBA loan.
- The Request: The factoring company drafts a subordination agreement.
- Bank Review: You submit the agreement to your bank’s loan officer for legal review.
- Execution: The bank signs the document, agreeing that the factor has first rights to the invoices.
- Funding Commences: The factoring company completes their onboarding and begins advancing funds.
Common Mistakes & Pitfalls
A major pitfall is waiting until the last minute to request a subordination agreement. If you are low on cash and need immediate factoring, you cannot afford to wait 14 days for a bank’s legal team to process the paperwork. If you want to know if you can bypass this by using two factors, read can you have two factoring companies at once trucking.
Frequently Asked Questions (FAQ)
Does a subordination agreement cost money? Banks often charge a processing or legal review fee (usually $150 to $500) to draft and execute a subordination agreement.
What happens if the bank refuses to sign? If the bank refuses to subordinate the receivables, the factoring company will deny your application. You will have to either pay off the bank loan or find a lender willing to consolidate your debt.
Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. Privacy Policy
About the Reviewer: Dr. Alex Merton is the Senior Financial Researcher at FactorFreight. With over 15 years in commercial logistics finance, Alex specializes in helping small carriers and owner-operators navigate complex cash flow solutions and factoring contracts.