Subordinate debt is second-tier debt. The subordinate lender has a second lien position, whereas the senior lender retains the right to the first lien position.

The first position has the right to remain whole, meaning that they’re entitled to repayment before the second-tier lender.

Senior lenders are typically asset-based, while subordinated lenders can be any type of financial institution. Whether you’re a business owner, a private equity group, or a senior lender, subordinated debt financing is a powerful tool for accessing the capital necessary to complete transactions alongside a senior lender or to grow without having to pay off your senior lender.

Subordinate lenders are called upon to provide additional capital for continued growth when a senior lender can’t extend more credit, or a capital gap is delaying the completion of a transaction.

In most cases, there’s a gap between how much capital the business needs to accomplish its goals and what they have on hand. This can result from numerous situations, like a senior lender or private equity firm being unwilling to offer additional funding, but the reasons are basically all the same – there’s a need for capital that the senior lender or private equity firm cannot fulfill, but the subordinate lender can.

Once the transaction is funded, the senior retains the right to first position, and the second lien position applies to the subordinated lender for the sub debt.

Sub debt is a powerful tool for entrepreneurs who are on the verge of completing large investments but don’t have every dollar they need to get the deal across the finish line.

This can happen for a variety of reasons, including shortfalls in collateral, insufficient buyer equity, and senior lenders being unwilling to offer additional capital to the business. Regardless of the reason, the business needs additional capital to complete its goals.

Here are a few situations where you should consider subordinate financing /sub debt:

• There is a need for an overadvance or more capital, but the senior lender is unwilling to provide additional capital.
• The business doesn’t have qualifying A/R, real estate, inventory, or other collateral to leverage.
• You’re trying to take on a new credit facility, and there is a gap.
• You’re trying to move senior financing off your balance sheet that’s no longer in the formula, or you popped a covenant.

Loan sizes range from $100,000.00 – $10,000,000.00

Terms are up to 24 months