Subordinated loan advantages and disadvantages

Is the subordinated loan reserved for corporate life, or can a subordinated loan be taken out for private use?

business woman different directions with subordinated loan

Those wishing to start their own business or business will almost immediately be confronted with the issue of a business loan . At the start of the activity, solid and rolling material must be purchased, such as computers, commercial vehicles, and / or machines. The same problem arises when things are doing well and people want to quickly borrow money to invest in the further expansion of the business.

What is a subordinated loan?

A subordinated loan is a form of credit whereby the lender will be subordinated in the event of bankruptcy of the company or inability to pay. In order to understand the importance of the subordinated loan, it is therefore important to understand the order of creditors’ credit.

In principle, ordinary creditors (also known as creditors) will receive the same amount after deduction of the privileged creditors. Privileged creditors, such as mortgage creditors or creditors who have a different privilege, will in any case come before the other creditors.

Whoever has a mortgage or other privilege will in other words be able to recover his outstanding debt first from the estate, after which the remaining part will accrue to ordinary creditors. The subordinated loan ensures that the creditors still come after the category of ordinary creditors in exchange for a subordinated loan. Due to the fact that the subordinated loan only provides third-party access to the assets of the company or the business, the lender of this business loan will almost never receive its full credit amount back.

Comparing a subordinated loan as part of the business life

The subordinated loan regularly occurs as an investment form between companies . In times of economic and financial recession, classic lenders such as banks are reluctant to offer a business loan.

Anyone carrying out a business loan simulation will notice that the loan is not allowed, or at a high interest rate. Anyone who believes in the project of another company can choose to invest via a subordinated loan instead of through another form of financing such as buying shares. The company that invests will not receive a right of participation as a shareholder, but can also benefit from interest on this granted loan.

The subordinated loan is also used by buyers of a company. Candidate buyers can agree with the original owners that a portion of the purchase price is considered a subordinated loan instead of borrowing money from another lender. The original owners immediately receive a portion of cash and at the same time make an investment in the future. The new owners can immediately take over the company and start doing business without dependence on other creditors.

Subordinated loan to get credit or loan

To get a business loan, the bank will check how solvent the company is. We make a distinction between the capital of the company and the loan capital. The loan capital is the debts that the company has to pay to third parties.

Even if you have a credit current account on the balance sheet, the bank will view this as a loan capital. After all, the current account has to be paid back to the manager, a bank will therefore also consider this debt to the manager as loan capital.

If you have a current account, it can be converted into a subordinated loan. A bank will view it as quasi-capital and allocate it to the equity of the company. No intervention of the notary is required for this: the drawing up of an agreement is sufficient. The subordinated loan must therefore be transferred separately on the balance sheet.

Capital still sees the bank as the best option, but when it comes to limited amounts, the conversion of a current account into a subordinated loan is the fastest and cheapest option.

Subordinated loan for private individuals?

What is a subordinated loan for individuals? And is there such a thing as a subordinated loan for private individuals? On the financial market, to date, no lender offers a subordinated loan for private individuals. Nevertheless, there are subordinated loans in the broad sense of the word for private individuals.

After all, those who take out a mortgage loan will give permission to the mortgage lender to be reimbursed first in the event of default. If, for example, you have both a personal loan and a mortgage loan and you can no longer pay the monthly repayments and interest, the mortgage lender will be able to sell the house and be the first to pay the outstanding sums as a priority on the lender of the personal loan . . The lender of the personal loan can therefore be regarded as the lender with a subordinated loan.

Advantages of subordinated loan

The above makes it clear that a lender who allows a deferred loan after a loan simulation runs more risks than a regular lender. However, this higher risk is compensated by the following benefits:

  • Higher interest rate loan . Anyone who compares the interest rate of the personal loan and the subordinated loan interest notes that the interest rate of a subordinated loan is several times higher. The increased risk for the lender of the subordinated loan is therefore compensated by a higher yield;
  • Opens the way for the future. Anyone who believes in the story of a company supports the borrower in two ways via a subordinated loan. In addition to a direct financial incentive for the borrower, other lenders also become warmed by a subordinated loan. After all, the position of the ordinary lender is strengthened, as a result of which banks will suddenly be inclined to allow credit. Anyone who receives a subordinated loan from a company or family member of EUR 100,000 or more will be able to convince other creditors more quickly to invest EUR 50,000 in the company. After all, the creditors of the business loan receive their EUR 50,000 back before the other company or the family member sees the EUR 100,000 loaned back.

Subordinated loan similar to win-win loan?

The win-win loan is an initiative of the Flemish Government to encourage private individuals to invest in new and growing SMEs. For example, anyone who has a son / daughter or close friend who thinks that he will develop his or her own business, but lacks the starting capital, can support this entrepreneur via the win-win loan . The win-win loan is therefore exclusively intended for private individuals and therefore not for companies. An enterprise that wishes to invest in support can only rely on the subordinated business loan or invest capital in the company in exchange for shares.

In principle, the win-win loan can be granted by any individual (with the exclusion of the direct stakeholders, such as the spouse or employee) to any SME with a branch in Flanders.

To qualify for the annual tax discount of 2.5%, however, some additional conditions apply. For example, the win-win loan can only take the form of a subordinated loan, and not a traditional loan. In case of bankruptcy, the parent or friend will only be paid after the other creditors. The maximum amount of the win-win loan was set at EUR 200,000 (with a maximum of EUR 50,000 per lender), which must be repaid after a maximum of 8 years.

Are things going bad and can the son / daughter or friend not repay the win-win loan? Then the creditor who granted the cheap win-win loan receives a one-off tax credit of 30% on the sum borrowed. The win-win loan can therefore be regarded as a specialization of the subordinated loan, but does not necessarily function in an identical manner.