First lien

What is a First Lien?

A First lien refers to the primary position in recovering debt or the right to assets used as collateral when a loan is not repaid. In financial factoring, this term is significant as it determines which creditor gets paid first in the event of a default. If a company borrows money using its receivables as collateral, the lender with a first lien on these receivables will have the foremost claim.

How Does First Lien Work in Financial Factoring?

In financial factoring, businesses sell their invoices or receivables at a discount to a factor to get immediate cash. If the business has existing debts, the factor needs to know if there is a first lien on those receivables. A first lien lender must be paid before any other creditors if the borrowing company fails to pay their debt.

Benefits of First Liens

Having a first lien provides a lender with a higher level of security and priority over other creditors. It reduces the risk and ensures that in case of liquidation, first lien holders are compensated before others. For businesses, securing a loan with a first lien may lead to more favorable borrowing terms due to the reduced risk for the lender.

Considerations for Factoring Agreements

When entering a factoring agreement, it is crucial to know if a first lien exists. It affects the factor's risk and the amount of cash they are willing to advance. A clear understanding of lien positions helps businesses and factors make informed decisions and manage risk effectively.