The subordinated loan is mainly for the business market, although in theory it is also possible to make private use of it. The subordination relates to the order in which creditors can be placed when they claim their money back. In this respect, the subordinated loan is a product that often leads to relatively high interest rates, but can pave the way for other loans to be taken out. In this way, the subordinated loan is often an interesting business choice, for companies that would like to raise more capital.
The subordinated loan poses a relatively high risk to the lender, but can limit the risk for other lenders who offer a regular loan. It is a type of loan that mainly companies take out or offer, in order to finance each other and ensure that investments are possible. In addition to the subordinated loan, there are other financial products that can make use of a subordination, which makes it possible, for example, to project a certain degree of confidence to the outside world.
Higher risk for the lender with subordinated loan
The subordinated loan poses a higher risk for a lender, because it will be ‘at the back’ when the estate needs to be divided. Suppose a company uses a subordinated loan from a bank and the company goes bankrupt. In that case, it will first be the turn of the other creditors to claim their share. The issuer of the subordinated loan can only claim the money if there is enough left over. This ensures that a subordinated loan provider is more at risk than the other lenders.
In most cases, this higher risk leads to a higher interest rate, which must compensate for the risk. This ensures that a subordinated loan is almost always more expensive than a regular loan. A lender determines the cost of a credit based on the risk you run. The higher the risk for a lender, the higher the costs in the form of the interest rate. This means, among other things, that the subordinated loan is more expensive than a regular loan. However, on the other hand, the subordinated loan also brings benefits, which we will of course also highlight.
Limit risk for new loan
One of the benefits of the subordinated loan is the confidence it places, along with the ability to pave the way for other loans. The moment a company succeeds in taking out a subordinated loan, this means that capital can be raised without it getting in the way of other lenders. For example, if a company seeks $ 100,000 in financing and already receives $ 50,000 from a subordinated loan, the new lender is at risk for only the remaining $ 50,000. Thanks to the priority during claiming, the subordinated loan provides the new lender with an important advantage.
If there is already a subordinated loan from another party, this also gives a lot of confidence to any new investors. They can assess the choice of the provider of the subordinated loan and, among other things, infer that it is a healthy company. If the provider of the subordinated loan dares to take the risk, it is a smaller step to offer a regular loan yourself. In this way, a subordinated loan can make a positive contribution to the financing of any company.
Subordinated loans for and by companies
It is theoretically possible to take out a subordinated loan as a private individual, for example with friends or family. In fact, compared to a mortgage loan from a bank, the other loans automatically form a subordinated loan. The mortgage lender usually has the first right to claim the money loaned, so the rest of the credits are automatically subordinated. However, the actual subordinated loan actually only occurs within the business circuit. The companies use this form of credit to help each other and, for example, pave the way for other investors.
In particular, start-ups often still need to gain confidence, for example at the bank. The moment that a company already has a subordinated loan, automatically leads to more confidence and security. There is a kind of cushion, as it were, since the issuer of the subordinated loan will notice the first blows when financial problems arise. In addition, this helps to ensure that another lender can apply a sharper interest rate, which means that the high costs of the subordinated loan can also be partly offset by the new loans to be taken out.
Other subordinated products
The subordinated loan is not the only product that can be offered or taken out with a subordination. This occurs frequently in securitization transactions. It is then possible, for example, to issue subordinated bonds, which are deferred with interest and redemption payments. This means that there is a sort of ranking of obligations to be paid, which is also known in technical terms as a ‘waterfall’. The subordinated loan has the same type of ranking, since it is the turn of the regular creditors when there are problems.
In this respect, the subordinated loan is a bit of an oddball and usually stands out because of the interest rate that is higher than with regular loans. It is mainly a form of credit that can help companies well, when they have difficulty obtaining money or when they need to gain trust from a large bank. The subordinated loan does not actually exist in this form in the private circuit. It is therefore difficult to take out the subordinated loan online or to make an online comparison, it is better to contact one of the (business) banks.