Merel Nijland
Introduction
A subordinated loan quickly has a negative impact. However, this is not entirely right, because it can have a positive effect. This way of financing has become popular among SME entrepreneurs in recent years, just like other alternative forms of financing.
What does a subordinated loan mean?
A subordinated loan is a loan that is subordinated to other creditors. If the recipient should go bankrupt, the creditor is almost at the bottom of the list. He only has priority over shareholders and partners.
This loan is primarily issued by investors, family, friends or business partners. The difference with a normal loan lies in the risk. A subordinated loan involves a lot of risk for the lender. You can read more about this later in this article.
Increase equity.
You can add a subordinated loan to your own funds under certain conditions. This is a big advantage if, for example, you want to apply for a bank loan. When the solvency is calculated, they include the subordinated loan in their own funds. This improves the financiability of your company.
When this loan meets the following conditions, it qualifies as equity:
- The loan must not be secured.
- The fee for the loan depends on the profit;
- The debt is subordinated to all other creditors;
When is a subordinated loan a good option?
Below, we have described three situations when a subordinated loan can be a good option. We'll go through them with you one by one.
- (Young) companies that are growing rapidly.
Young fast-growing companies are seen by the bank as a high risk for financing. A number of alternative financiers also find this risk too high. These young companies are mostly funded by investors.
A subordinated loan may then be an option. With this loan, the company can realize its plans and grow at the same time. In addition, it will also be easier for them to take out other loans in order to grow even further and faster.
- Companies that are in trouble.
As an entrepreneur, you always try to keep your head above water. A subordinated loan can be an option to stabilize your business. It is not the most ideal situation, but it can be just the push in the right direction. The risk of things going wrong is quite high, so you can count on a high interest rate. In this situation, the lender usually comes from their own circle of acquaintances.
Despite the high risk, it can be advantageous. The lender achieves a good return and you can get back to business. Will the company eventually go bankrupt anyway? Then the lender will probably not see their money again.
- Companies that are sold and taken over.
Thinking about selling your company? Then a subordinated loan can be a win-win situation. For both the buyer and seller. Does the buyer not have enough money or does he not want to put all his own capital into it? Then, as the seller, you can offer him a subordinated loan.
What is the advantage of this? At the bottom of the line, the buyer receives more for his company than he had previously calculated. This is due to the interest that must be paid on the subordinated loan.
There is, however, one important point of attention. It is possible that the company goes bankrupt after the sale. If the loan has not been fully repaid by then, there is a good chance that the creditor will not see the money again. Be aware of this risk.
What is the risk of a subordinated loan?
As you may have noticed by reading this article, a subordinated loan involves a lot of risk. This is because there are very few certainties. In the event of bankruptcy, there is a small chance for the lender to see his money again.
The risks therefore lie mainly with the lender. And that is where the disadvantage lies for the recipient of money. Due to the high risk, high interest rates are calculated. That makes a subordinated loan a relatively expensive option.
Direct lending as an alternative.
A loan that is subordinated is ideal if you need more capital, are selling your business, or if you want to keep your head above water. However, it is not always easy to get a subordinated loan, because there is simply not much on offer.
Direct lending is a fast and accessible way to secure your financing. This way of borrowing does not count towards your own assets. But compared to the bank, a direct lender is willing to take more risks and you can use the financing within a few days.
Want to know more about direct lending? We have the four most important benefits lined up for you.
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