We all know the classic forms of loans that you and I, as individuals, have certainly used. In addition to the classic forms, however, there are also loans that focus specifically on the business world. One of the best known forms of loan within this category of loans is the subordinated loan. A subordinated loan is in short a loan that is provided to companies and in most cases also by companies. The borrower of the amount is in most cases no longer able to take out a normal loan.
In this case, a subordinated loan can be the solution par excellence. 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 a picture 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 another company such as a bank or an investment company to another company. The term ‘subordinated’ is of primary importance in this regard.
This is because it concerns a loan where the lender comes in the back of a row in the event of a bankruptcy of the company to which the credit was granted. In practical terms, this means that if there are several creditors, the creditor who made the subordinated loan available will only be able to reclaim his amount as the last or one of the latter.
Despite this negative aspect of this form of credit, there are of course advantages attached to this loan. Let us take a closer look at these advantages and disadvantages of the subordinated loan and also look at the specific order in which debt is demanded and which is of crucial importance when providing a subordinated loan.
The order of repayment in the event of a possible bankruptcy of a company is something that is regulated by law and that particularly disadvantages the subordinated loan. When repaying debts, the fact is that first of all the preference debts will have to be repaid.
Once this has happened, it is the turn of the credit companies that have granted the company traditional loans. If these have also been repaid, any subordinated loans will only be discussed. Despite their position, this form of credit still has priority over the potential shareholders or bondholders of the company.
Providing a subordinated loan has both its advantages and disadvantages. The big advantage for the company, bank or investor that provides the credit is that a high interest rate is required on this form of borrowing. The lender therefore receives a substantial additional sum with each repayment.
This sum must therefore cover the high risk associated with this form of borrowing. Give a little, take a little. In addition, the interesting aspect is that no tax has to be paid on the interest on the amounts received. In the meantime, you will know the disadvantage of the subordinated loan.
As an investment company or lender, you are placed at the end of the list of creditors. That is simply the great risk that you take when providing a subordinated bill and that is ultimately what it is all about.
Take out the subordinated loan
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 borrowing.
Companies usually use this form of borrowing because, for certain reasons, they can no longer obtain a normal loan. Immediately also the most important advantage for the borrower.
In this case we have to think, for example, of companies that are struggling with 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 considered as equity. Yet also a financially interesting advantage for the relevant company. The disadvantage is that, because of the high risk that the lender runs, a high interest rate is requested.
This high interest rate in combination with the monthly repayment that has to be paid, can cause a company that was already in a lesser position to have financial problems. So a lot of advantages and disadvantages for both the lender and the person taking out the loan. Quite a few advantages and disadvantages, which are also carefully considered. If you want to know more about the subordinated loan, you can also find information about this on Wikipedia.