We are all familiar with the classic forms of loans that you and I as private individuals have certainly used before. In addition to the classic forms, however, there are also loans that specifically focus on the business world. One of the best-known loan forms within this category of loans is the subordinated loan. In short, a subordinated loan is a loan that is provided to companies and in most cases also by companies. In most cases, the borrower of the amount is no longer able to take out a normal loan.
A subordinated loan can offer the ideal solution in this case. An interesting solution of which we would like to explain the how, what and why. In this way you will immediately be able to form an idea of what a subordinated loan is and whether it can also be considered in your unique situation.
To make the concept of subordinated loan even clearer, it is interesting to first place the loan itself in the spotlight. As already indicated, the subordinated loan is provided by a company such as a bank or an investment company to another company. The term 'subordinated' is particularly important here.
This is because it concerns a loan where the lender comes at the back of the queue in the event of a bankruptcy of the company to which the credit was provided. In practical terms, this means that if there are several creditors, the creditor who provided the subordinated loan will be the last or one of the latter to be able to recover its amount.
Despite this negative aspect of this type of credit, there are of course also advantages to this loan. Let's take a quick look at these pros and cons of the subordinated loan, as well as the specific order used in claiming debt, which is critical when making a subordinated loan.
The order of repayment in the event of bankruptcy of a company is something that is regulated by law and that is particularly disadvantageous for the subordinated loan. When repaying debts, it is the case that first of all the preferential debts will have to be repaid.
Once this has happened, it is the turn of the credit companies that have provided the company with traditional loans. If these have also been repaid, then any subordinated loans will be discussed. Despite their position, this form of credit still takes precedence over any shareholders or bondholders of the company.
Providing a subordinated loan has both its advantages and disadvantages. The great advantage for the company, bank or investor that provides the credit is that a high interest rate is required on this form of borrowing. With each repayment, the lender therefore receives a considerable sum extra.
This sum must therefore cover the great risk associated with this form of borrowing. Give a little, take a little. In addition, there is the interesting aspect that no tax has to be paid on the interest on the amounts received. You will know by now what the disadvantage is of the subordinated loan.
After all, as an investment company or lender you are placed at the back of the list of creditors. That is the great risk you take when providing a subordinated account and that is what it is all about in the end.
In addition to the lender, a company, investor or bank, there is of course also the company that takes out the subordinated loan. For this company too, there are undeniable advantages and disadvantages associated with this form of loan.
Companies usually rely on this form of borrowing because they can no longer obtain a regular loan for certain reasons. This is also the most important benefit for the borrower.
In this case, we should consider, for example, companies that are facing financial problems, or companies that have already taken out several traditional loans with a bank. It is also important that the subordinated loan can sometimes be regarded as equity. Still a financially interesting advantage for the company in question. The disadvantage is that, due to the high risk that the lender runs, a high interest rate is charged.
This high interest rate, in combination with the monthly repayment that has to be paid, can cause financial problems for a company that was already in lesser papers. A lot of advantages and disadvantages, therefore, for both the lender and the person taking out the loan. A lot of advantages and disadvantages that should also be weighed thoroughly. If you want to know more about the subordinated loan, you can also find information about this on Wikipedia .