What Is a Subordinated Loan?

A subordinated loan is one that is in a secondary position to a primary loan. A subordinated loan is a much riskier type of lending instrument, compared to a standard business loan. Because of the increased risk, finding a lender that offers them may be difficult depending on your situation. Here are the basics of a subordinated loan and how they work. 

How Subordinated Loans Work

When you take out a business loan with collateral securing it, this is referred to as a primary loan. If you default on the loan, the primary lender will have the right to foreclose on the collateral that secures the loan. If you take out a subordinated loan, the subordinated lender will be second in line for the same collateral. Therefore, if you go bankrupt, your assets will be liquidated. The primary lender gets paid for their debt first. Then if there is anything left, the subordinated lender will get the rest. This is the same principal as using a home equity loan in a residential mortgage situation. 

Things to Consider

Subordinated loans will typically be at a higher rate of interest than a standard loan. This represents a higher risk for the lender and they will charge accordingly. Convincing a lender to take a subordinated position is also very difficult to do in some cases. 

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