Subordination

Definition

A creditor's agreement to be paid after another lender is paid.

Why It Matters

Your bank will not fund until everyone else agrees to be paid second, so the seller's willingness to sign is a financing condition wearing the clothes of a courtesy. Read what the document actually restricts rather than assuming: the ordinary version stops the seller accelerating, suing, or taking collateral while the bank is owed anything, and the SBA's full standby version stops the payments themselves.

In numbers: On a $4M deal funded with a $3.2M bank loan and a $400,000 seller note, subordination is what keeps the seller from collecting ahead of the bank after a missed payment. Full standby goes further and holds every payment on the note, principal and interest, for the life of the SBA loan.