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Subordination
Also called subordinated debt, ranking behind.
An arrangement in which one creditor agrees to rank behind another for payment or for claims on collateral, changing the order that priority rules would otherwise produce.
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What it means
Two varieties are worth keeping separate. Lien subordination changes the order of claims against specific collateral: the subordinating creditor keeps its lien but agrees it sits behind the other party's. Payment subordination goes further and restricts the junior creditor from receiving payments at all in defined circumstances, typically while the senior debt is in default.
It is a matter of contract, not of filing. A creditor who filed first can agree to sit behind a creditor who filed later, and the agreement binds them regardless of what the public record shows. This is why a UCC search establishes filing order but does not by itself establish who actually gets paid first.
It comes up whenever a business with an existing blanket lien wants new money: a bank line behind an equipment lender, an SBA loan behind an existing advance, a factoring facility behind a term lender's all-assets filing. The new lender's condition is usually that the incumbent subordinates as to accounts receivable, or terminates entirely.
Where this one catches people
There is no obligation on an existing lienholder to subordinate, and often no commercial reason to. Owners treat it as a formality — a form the old lender signs so the new deal can close — and build a timeline around it. An incumbent may refuse, may charge for it, or may simply not respond for weeks, and the new facility does not close until it does. Where the incumbent is a merchant cash advance funder, refusal is the norm.
Where you will meet this term
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Subordination — common questions
What does subordination mean?
An arrangement in which one creditor agrees to rank behind another for payment or for claims on collateral, changing the order that priority rules would otherwise produce.
Where does subordination catch people out?
There is no obligation on an existing lienholder to subordinate, and often no commercial reason to. Owners treat it as a formality — a form the old lender signs so the new deal can close — and build a timeline around it. An incumbent may refuse, may charge for it, or may simply not respond for weeks, and the new facility does not close until it does. Where the incumbent is a merchant cash advance funder, refusal is the norm.
Is subordination the same as an interest rate?
Subordination is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does subordination apply to?
Term Loan, Business Line of Credit, SBA Loan, Invoice Financing, Asset-Based Lending.
Is there a worked example of subordination?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside subordination?
Intercreditor agreement, Second position, Senior lien, Subordination agreement, UCC termination.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.