Subordinated Debt

Subordinated Debt

Access non-dilutive capital from market leaders in $100K to $10MM transactions without real estate or collateral.

Qualifications:

  • 1+ Year in Business
  • $1M+ in Annual Revenue

Access non-dilutive capital from market leaders in $100K to $10MM transactions without real estate or collateral.

Qualifications:

  • 1+ Year in Business
  • $1M+ in Annual Revenue

Empowering Growth with Flexible Funding

What Is 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.

How Does Subordinated Debt Financing Work?

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.

Subordinate vs. Senior Lenders

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.

When to Consider Sub Debt Financing

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.
What Do You Need to Apply?

NexxFund Financial 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 NexxFund, you’ll need:

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

$2+ Billion Financed

$2+ Billion Financed

Since 2007, NexxFund Financial has
accelerated business growth nationwide

Since 2007, NexxFund Financial has
accelerated business growth nationwide

Exclusive
Relationships

Our longstanding relationships with top B2B lenders allow clients to receive offers they can’t get anywhere else.

Personal
Advisors

Work with your dedicated Business Finance Advisor to personalize your financing to your unique needs.

Funding On
Your Timeline

Plan for future projects or cover immediate capital needs faster than with traditional banks.

Long Term
Perspective

You’re not getting just a loan. We aim to build a relationship that streamlines access to future capital.

Capital Without Compromise

Terms that allow you or your clients to Grow to Greatness.

Loan Size

$100K to $10MM

Terms

Up to 24 Months

Rates

Starting at 15%

Subordinated Debt Financing FAQs

A subordinated loan, also known as subordinated debt, junior debt, or junior security, is a form of borrowing where repayment is prioritized after the settlement of all primary loans, assuming there are sufficient remaining funds. In contrast, primary loans are classified as senior or unsubordinated debt, indicating their higher priority in repayment over subordinated loans.

Subordinated debt is a form of debt financing, meaning there is no equity transaction between the borrower and the subordinate lender. The financing doesn’t dilute stockholder value.

Senior debt describes the funds the tier 1 lender provides in the transaction. The senior lender usually enters the equation before the subordinate lender, and the senior lender’s debt is paid before the subordinated debt in a default situation.

The main difference between the two is the priority in which each lender is repaid during a default or liquidation event. Debt with a higher priority over other forms of debt is always considered the “senior debt” in that scenario.

Debt is listed as a liability on any balance sheet. The order is as follows:

  • Current liabilities
  • Senior debt
  • Subordinated debt

Subordinated funds won’t decrease the business’s equity, so there’s no dilution of ownership.

Senior debt describes the funds the tier 1 lender provides in the transaction. The senior lender usually enters the equation before the subordinate lender, and the senior lender’s debt is paid before the subordinated debt in a default situation.

The main difference between the two is the priority in which each lender is repaid during a default or liquidation event. Debt with a higher priority over other forms of debt is always considered the “senior debt” in that scenario.

Subordinated debt is broken down into various types, ranked in order of repayment priority: high-yield bonds are at the top, followed by mezzanine debt (both with and without warrants), Payment in Kind (PIK) notes, vendor notes, and other debt obligations. A subordination scale can also depict this hierarchy, where high-yield bonds are the least subordinated, and vendor notes have the highest subordination.

Mezzanine debt is a hybrid form of financing that sits between secured senior debt and company equity in the capital structure. It’s subordinate to senior debt, entailing more risk but offering greater potential returns. Mezzanine financing often blends debt and equity characteristics with regular interest payments and an option to convert into equity under certain conditions.

Asset-backed securities frequently feature subordinated tranches, which rank lower in priority compared to senior tranches. These securities are financial instruments supported by asset pools, like loans, leases, credit card debts, royalties, or receivables. Tranching these assets divides risks and characteristics, attracting a wider investor base due to differentiated risk profiles.

Subordinated debt offers an avenue to expand capital facilities without refinancing or taking out a new loan entirely. Since it’s subordinated, it won’t interfere with collateralized assets or senior facilities.

It allows for overadvances when senior lenders are unwilling to do so. For ABL and factorers, it offers a fast and efficient way to cover clients’ capital gaps and manage balance sheets.

Although subordinated debt often comes with higher interest rates, the benefits often outweigh the cost. Given the current interest rate environment, subordinated debt often presents a comparatively affordable option for capital funding.

The predominant form of mezzanine debt is unsecured, subordinated debt, making them fundamentally similar in nature. However, the principal distinction lies in the fact that mezzanine debt typically involves debt paired with equity participation, a feature not commonly associated with subordinated debt.

Mezzanine debt can contain covenants, warrants, and other stipulations that can suddenly surprise business owners with a loss of ownership. For this reason, it’s recommended to explore alternative options to mezz debt before finalizing a contract.

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