What is a subordinated loan?
With a subordinated loan, the lender deliberately takes a place towards the back of the queue. If your business goes bankrupt, the bank and other ordinary unsecured creditors are paid first. Only then does the subordinated lender receive payment — but before the shareholders.
Why is this useful?
Because banks often count a subordinated loan, in whole or in part, as risk-bearing capital. Your solvency ratio improves on paper, making the bank more willing to provide additional senior credit. One euro of subordinated capital can therefore unlock several euros of bank financing.
Who provides subordinated loans?
- Private debt funds and private equity firms
- Regional development agencies
- The seller in a business acquisition (a vendor loan)
- Family, angel investors or the management team itself
Terms to watch out for
- Interest: typically 7% to 12%, higher than bank rates
- Term: often five to eight years, with no principal repayments in the initial years
- Subordination deed: establishes the bank's priority — it often also includes a payment standstill if covenants are breached
- Conversion rights: the loan can sometimes be converted into shares
Subordinated loans in business acquisitions
A vendor loan is a common solution in business succession: the seller leaves part of the purchase price in the business as a subordinated loan. This reduces your financing requirement and signals confidence to the bank.
Risks
- If results fall short, you are often not allowed to pay interest or repay principal without the bank's consent
- Interest costs reduce your profit, while the capital provides no voting rights
- In bankruptcy, the likelihood of repayment is low — for the lender, but this translates into stricter terms for you
Conclusion
A subordinated loan provides leverage: it carries a higher interest rate, but can enable cheaper bank financing. Always calculate the total weighted financing cost rather than looking only at the interest rate.
Sources and scope
Examples and policy choices in this article are illustrative, not a current quotation, fixed standard or financial or legal advice. The editorial revision date relates to the summary, structure and source references; it is not a reference date for the underlying data.
| Primary source | What is it used for? |
|---|---|
| KVK (Dutch Chamber of Commerce) — checking business partners | Company identification and checks on business partners. |
Source links support the topic mentioned, but do not automatically substantiate all percentages, time frames or examples in this article. Check current terms and rules with the responsible authority.
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