Person who took out the loan
A subordinated loan is a loan form for companies. The name says it a bit naturally; we speak of a subordinated loan if the person who took out the loan can no longer repay the borrowed money.
It is a loan where the lender is subordinated if the company goes bankrupt. This creditor then receives his money back later than other parties. For example, some creditors have more priority. You can think of shareholders, partners, an insurance company or the tax authorities.Do you want to know more about a subordinated loan?
Interesting for starting entrepreneurs
As a result of the conditions set, a creditor runs the risk that the loan will never be repaid. The lender compensates this risk again by charging a higher interest rate. The interest rate is also often dependent on the profit of a company. The lender does not have to pay tax on this either. For people who want to start a business but do not have sufficient financial resources, a subordinated loan can be interesting.
The moment a company goes bankrupt, the subordinated lender is actually subordinated. This is the first to absorb the blow of the bankruptcy. A subordinated loan therefore acts as a kind of cushion.
Only for companies
A subordinated loan is only granted to companies. Typically, the lenders are an umbrella company or a large bank. They can also estimate the risk much better. In some cases it is possible to take out a subordinated loan with the government. This loan form is also referred to as a subsidy. A lender who provides a subordinated loan does show the entrepreneur that he takes business plans very seriously. The lender therefore believes that the company has a large chance of success.
The securities trade
In the world of securities trading, many subordinated loans are taken out. The issuer of the securities hereby issues various linked subordinated bonds. These bonds are not subordinated by bankruptcy. The subordination is used with every payment of interest or repayment that is made. In this way a ranking list is put together which is also called “waterfall”. A good example of “waterfall” could be:
- Payment of the payment is first provided to service providers.
- Then it is the turn of the transaction parties.
- Now follow the bond holders with status A.
- Subsequently the bondholders with status B.
- All creditors that remain fall under the category C bondholders.