Subordinate financing is a type of debt where the lender ranks below senior lenders in their claim on collateral.
For example, a business seeks a $300,000 mezzanine loan to fund an expansion. Because the mezzanine lender accepts subordinate financing — ranking behind the senior bank loan in case of default — it charges a higher interest rate of 13% to compensate for the additional risk.
Why it matters: It is riskier and more expensive than senior debt, but acts as a crucial gap-filler to complete complex acquisitions or buyouts.
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