What is subordination of debt?
August 12, 2017. When a lender agrees to the subordination of debt of one of their existing customers to another lender. This puts them secondary and behind in the lien position to the company they are agreeing to subordinate their customer to.
Example of subordinating debt:
A business applies for a loan but the lender cannot close the loan because a different lender already has a lien on the same assets of the borrower.
The subordination of debt issue has become even more of a hurdle when customers have one or more Merchant Cash Advances and tries to get a different type of loan.
Accounts receivables lenders and many other lenders have issues closing their financing due to existing Merchant Cash Advances. A Merchant Cash Advance provider may already have a blanket lien on all furniture, fixtures and receivables on the customer’s UCC listing.
This means that the new Lender as well as any other Lender cannot put a lien against the receivables. They must ask that Lender to subordinate rights to the receivables to them. For Funding that does not require you to subordinate debt, contact us below and get started.
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The lender that subordinates gives up their rights to that specific Collateral. Why would a Lender be willing to give up rights to Collateral?
It is usually because the Lender took all of their customer’s Collateral for their Loan. They did not need all of the Collateral and is really not interested in all the Collateral.
They took all of it because it was available and the customer did not object or say no.
A Lender that takes a lien on all of a Company’s assets would only try to liquidate certain Collateral if the customer defaulted. As a result, they are often willing to give up rights to Collateral they never would have gone after anyway.
For more information on subordination of debt, visit resources such as the SBA.