Subordinated Debt Financing

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.

The difference between subordinated and senior lenders is their lien position. Senior lenders have the right to remain whole, meaning they have the first lien position.

Subordinated lenders fall into the second lien position and aren’t repaid until the senior lender is “made whole” in a default situation.

Senior lenders are typically asset-based, whereas subordinate lenders can be any financial institution. Subordinated lenders enter the transactions, not leveraging the company’s assets, and provide second-lien subordinated debt.

Businesses, senior lenders, and private equity groups can utilize subordinated debt to help push transactions across the finish line.

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.

Not only can we fuel successful transactions, but we can also help your client secure capital after the deal funds.

National Business Capital is a no-equity, non-mezzanine debt option.

The speed, simplicity, and power of our process make us uniquely capable of offering subordinated debt and ensuring transactions move across the finish line as swiftly and efficiently as possible.

Asset-based lenders and factoring companies can use subordinate debt as a method of managing their balance sheets.

Here are a few examples of when these lenders would call upon a subordinate debt lender.

• You’re trying to take on a new facility, but there’s a capital gap between the new facility amount and what’s owed to the senior lender. Using subordinated debt, your client can cover the capital gap, and you can take on the facility by gaining the first lien position.
• A client needs capital in excess of their current facility, but the senior lender is unwilling to provide the client with additional capital. The client can leverage subordinated debt to obtain their requested over advance, while the senior lender retains the right to first lien position.
• You have a client who is no longer in the formula. You notify the client of the change, but they don’t have the capital to cover their existing facility. Instead of taking a loss or unwanted risk, subordinated debt can bridge the gap to move the client off your books and satisfy all parties.
• If a prospective client applies for financing but has a first position lien against their assets, you can secure subordinated debt to repay the senior lender and move their facility onto your balance sheet.

National Business Capital is a market leader in $100k to $5m transactions. If you need subordinate debt financing, there’s no better team than the expert Business Finance Advisors at National.

• Approval Amount Based on Business Cash Flow
• No Personal Guarantee
• No Equity
• No Warrants
• No Covenants

National Business Capital makes subordinate debt financing easy by combining our 75+ lender marketplace and expert team to create a time-saving machine for entrepreneurs searching for the right lender.

To secure sub debt financing with National, you’ll need:

• Our Digital Application
• Prior Year’s Financials
• YTD Financials
• Prior Year’s Business Tax Return
• 6 Months of Business Bank Statements