Intercreditor agreement

Definition

The agreement between two lenders over who gets paid first.

Why It Matters

With a bank loan and a seller note in the same deal, the two lenders have to write down what the junior one may do when payments get tight, and the answer is usually close to nothing. It governs whether the seller note can be paid at all during a standby period, whether the seller may accelerate or sue, and who reaches the collateral first. Sellers regularly meet it for the first time a week before closing, which is the worst moment to discover that the note they negotiated cannot be enforced for two years.

In numbers: A $250k seller note behind a $1.5M SBA loan on full standby pays the seller $0 of principal for the first two years, whatever the note itself says.