Subordination Agreement
An agreement where one lender agrees its claim to collateral or repayment ranks behind another lender's claim, establishing which gets paid first in a default.
When a business takes on additional financing while an existing loan is outstanding, the new lender often requires the earlier lender to formally agree to a subordinate position, or requires the new debt itself be subordinated, clarifying repayment priority if the business can’t pay both.
Subordination agreements are common when a business layers different types of financing, like adding a working capital line while a term loan or real estate loan is already in place.
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