Subordinated debt

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Page written by Chris Godfrey. Last reviewed on March 13, 2025. Next review due October 1, 2026.

No matter if you need extra working capital, have an acquisition to fund, must cover a business emergency or you simply want to restructure existing borrowing, subordinated debt may be your best solution.

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What is subordinated debt?

Subordinated debt – also known as junior debt – is a type of loan or bond that ranks below senior debt in repayment priority. If a company defaults or goes bankrupt, subordinated debt holders are repaid only after senior debt obligations are fulfilled. Because it carries higher risk, subordinated debt typically comes with higher interest rates.

Subordinated debt is often unsecured, meaning it lacks collateral protection. Companies typically use subordinated debt for additional financing when their senior debt capacity is maxed out. This type of debt is riskier for lenders, but it can provide businesses with flexible funding without giving up equity.

What can you use subordinated debt for?

Subordinated debt is highly flexible and can be used for many business needs:

Business expansion – Funding for growth initiatives, new locations, or product development.
Acquisitions & mergers – Supplementing financing for acquiring or merging with another company.
Refinancing existing debt – Replacing or restructuring older, higher-cost debt.
Working capital– Covering operational expenses when cash flow is tight.
Mezzanine financing – Used in leveraged buyouts (LBOs) to bridge funding gaps.
Emergency liquidity – Providing businesses with additional cash during financial distress.
Infrastructure & equipment investments – Purchasing assets without increasing senior debt burden.
Growth without dilution – Raising funds without giving up equity ownership.

Subordinated debt at a glance

Subordinated debt is commercial debt that only gets repaid after senior debtors are repaid in full.
It is also often unsecured.
Because subordinated debt is riskier than senior debt, it usually carries higher interest rates.

What are the common types of subordinated debt?

There are different types of subordinated debt. Collateral may or may not be required.

Term Loans

Term loans are the most popular type of commercial loan. Offered by traditional banks, credit unions and online lenders, these loans are typically used for one-off investments where borrowers know exactly how much cash they need. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Borrow up to $5 million.

Best for: Expansion, acquisitions, refinancing

Business Line of Credit

Also known as a revolving line of credit, this is a business loan that functions like a high-value credit card but comes with lower interest rates and fees. Borrowers can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing.

Best for: Managing cash flow, working capital

Bridge loans

A bridge loan, also known as interim financing or a swing loan, is a short-term loan used to provide temporary financial assistance until a more permanent source of funding becomes available.

Best for: Real estate purchase or construction

Revenue-based financing

Revenue-based financing is similar to a merchant cash advance but with higher borrowing limits. Based on the size and regularity of their total revenues, businesses may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from their daily sales. This type of loan can usually be secured quickly as qualification rules are less intensive and credit scores are not so critical.

Best for: Managing cash flow, working capital

Pros and cons of subordinated debt

For borrowers, subordinated debt has advantages and disadvantages:

Pros:

Access to additional capital – Helps businesses secure financing when senior debt capacity is maxed out.
Lower cost than equity – Interest payments are typically lower than the cost of issuing new equity.
No immediate equity dilution – Unlike issuing stock, subordinated debt allows businesses to retain ownership.
Flexible repayment terms – Some subordinated loans offer deferred interest payments.
Can boost senior debt access – Strengthens capital structure, making senior lenders more comfortable providing funding.

Cons:

Higher interest rates – Due to increased risk, subordinated debt is more expensive than senior debt.
Increased financial risk – Higher leverage can strain cash flow and repayment capacity.
Potential for restrictive covenants – Some lenders impose conditions that limit business flexibility.
Risk of default – Missing payments can lead to restructuring challenges or forced asset sales.

Subordinated debt vs. senior debt

Subordinated debt ranks below senior debt in repayment and is often unsecured. Because it carries higher risk, it usually comes with higher interest rates. Used for many types of business financing, subordinated debt includes term loans, bridge loans and revenue-based lending. While subordinated debt increases capital access, it may expose borrowers to higher costs and repayment risks.
Senior debt has the highest repayment priority and is often secured by collateral. It carries lower interest rates than subordinated debt due to reduced risk. Common types of senior debt include revolving credit facilities and asset-based loans.

How to pay back subordinated debt

Borrowers repay subordinated debt through scheduled payments, often monthly or quarterly and including interest and principal, though terms will vary by loan type. Some loans may allow deferred payments or equity conversion. Since subordinated debt ranks below senior debt, repayment occurs only after senior debt obligations are met. If a borrower defaults, subordinated lenders may face delays or losses in repayment.

How Swoop can help

The interest rate, fees, and terms and conditions of subordinated debt can vary significantly. Shopping around before settling on a deal is essential. You can do this by approaching banks, credit unions and online lenders one by one over days, weeks, or even months – or you can contact Swoop to compare high-quality business loans from a choice of lenders. Get the flexible funding your business needs without the fuss. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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