What Does Subordination Agreement Mean?
A subordination agreement is created when a lender is given first priority to a company’s business assets with no regards to the outside lenders' provision of organization loans. The secured lender has all of the rights to the company’s assets, including contract rights and cash, which are used as collateral for the loans given to the company.
Divestopedia Explains Subordination Agreement
In a subordination agreement, a second lender can request that the first lender release a particular item of collateral. This process is known as subordination. In most cases, the requested subordination occurs in accounts receivable and inventory. If the first lender subordinates the assets, they are then turned over to the second lender. The first lender can also reject the offer, causing the immediate termination of the proposition.
In a middle market transaction, subordination is an important concept with regards to seller's financing. These will normally be unsecured or secured but most always subordinated to senior bank lender. This significantly increases the risk on the seller's financing, because lenders in a priority position will effectively be able to dictate repayment terms on the loan amount.